Breach of Fiduciary Claims Against Financial Advisors in Seattle, Phoenix, Denver, Grand Rapids, Ann Arbor and Chicago
Can I Sue My Broker or Financial Advisor for Breach of Fiduciary Duty?
The answer to this question is: Yes. One of the most common lawsuits brought by investors against a broker, financial advisor, and brokerage firm is a lawsuit for breach of fiduciary duty. The law firm of Israels & Neuman handles these claims.
Financial advisors should make sound investment advice, prudent financial decisions, and should safeguard their clients’ best interests. However, when a financial advisor breaches this trust—committing what is known as a breach of fiduciary duty—the consequences can be severe for the investor. When this happens, the advisor and/or their brokerage firm can be held responsible for damages and investment losses.
What is Fiduciary Duty?
Fiduciary duty is the highest standard of care in the United States. It is a legal obligation that requires financial advisors to act solely in their clients’ best interests, avoiding any conflicts of interest, and making decisions based solely on the client’s financial goals, risk tolerance, and needs. This duty is often contrasted with the “suitability standard” some financial professionals adhere to, which requires recommendations that are suitable for the client. The suitability standard is a lower standard than a fiduciary standard.
A fiduciary duty encompasses several key responsibilities:
- Duty of loyalty: Advisors must prioritize their clients’ interests over their own.
- Duty of care: Advisors must exercise prudence and competence in managing clients’ assets.
- Duty of good faith: Advisors must act honestly and transparently, disclosing all relevant information.
How Can a Breach of Fiduciary Duty Occur
A breach of fiduciary duty by a financial advisor can happen in various ways, typically when the advisor’s actions serve their own interests instead of the client’s. Some common examples include:
Self Dealing
This occurs when an advisor engages in transactions that benefit themselves at the client’s expense, such as selling a client a product that yields the advisor a high commission but is not the best option for the client.
Excessive Fees or Hidden Charges
Charging unjustifiably high fees or not disclosing commissions and costs associated with certain investment products can constitute a breach of fiduciary duty.
Failure to Diversify
Failing to spread investments across different asset classes, exposing the client to undue risk, is a violation of the duty of care.
Misrepresentation or Omission
Advisors are required to provide full, accurate, and timely information. Failing to disclose risks, conflicts of interest, or critical details about an investment can lead to significant financial harm for clients.
Churning
This is also known as excessive trading of securities in a client’s account to generate commissions, often without regard to the client’s financial objectives or best interests.
Failure to Act on Time
Advisors are expected to act promptly when handling their clients’ portfolios, especially in volatile markets. Delays in executing trades or making important decisions can lead to losses and are considered a breach of fiduciary duty.
Legal Consequences of a Breach of Fiduciary Duty
If a financial advisor is found to have breached their fiduciary duty, the client has several avenues for legal recourse. These may include:
- Lawsuits for Damages: Clients can file a civil lawsuit for damages incurred due to the breach. Compensation may include actual financial losses, lost profits, and, in some cases, punitive damages.
- Arbitration: Many financial advisor-client agreements include arbitration clauses. In such cases, clients may pursue claims through arbitration rather than a court trial, which can be faster and more cost effective.
- Rescission of Contracts: In some cases, clients may be entitled to have transactions rescinded, meaning the investment is unwound, and both parties are restored to their pre-contract position.
Preventing a Breach: How Clients Can Protect Themselves
Clients can take steps to reduce the risk of falling victim to a breach of fiduciary duty. These include:
- Choosing a Fiduciary: Always verify whether your financial advisor is legally required to adhere to fiduciary standards. Registered Investment Advisors (RIAs) are held to a fiduciary duty, while other types of financial professionals, may not be.
- Asking About Conflicts of Interest: Don’t be afraid to ask your advisor if they receive any compensation from third parties, such as commissions from selling certain products.
- Monitoring Accounts: Regularly review your account statements and ensure that transactions align with your financial goals. Keep an eye out for excessive trading (churning), investment losses or unexpected fees.
- Understanding Investment Recommendations: Don’t hesitate to ask for detailed explanations of why a particular investment or strategy is recommended, and make sure that it fits your risk tolerance and long-term objectives.