As securities lawyers, we always argue on behalf of our arbitration clients (usually successfully) that stockbrokers are fiduciaries who owe the highest duty of care and fidelity to customers. The relationship an investor has with his or her stockbroker is considered by most to be one of absolute trust. An investor entrusts a significant amount of hard earned money to the stockbroker and naturally assumes that the broker will invest that money with the best of intentions. Unfortunately, broker misconduct occurs every day in this country. When stockbrokers engage in misconduct, they violate the trust their investment customers placed in them. Shockingly, though, stockbrokers argue, and some courts agree, that brokers have no formal fiduciary duty to their clients.
There are many labels given to financial professionals. Stockbroker, investment advisor and financial planner are just a short list of all the titles available to the different types of financial professionals.
Before discussing the type of duty a stockbroker owes to his or her investor clients, we should clarify exactly what stockbrokers are and what services they provide. According to the Financial Industry Regulatory Authority (FINRA), a stockbroker is “a person or company that is in the business of buying and selling securities – stocks, bonds, mutual funds, and certain other investment products – on behalf of its customers (as broker) for its own account (as dealer), or both.”
A stockbroker buys and sells securities for his or her investment customer in exchange for a fee, either on each transaction the broker makes on the investor’s behalf or on a percentage of the investor’s managed assets. A qualified broker will be employed by a broker-dealer firm, will have passed the Series 7 and Series 63 exams, and will be registered with both the SEC and FINRA.
A Stockbroker’s Duty vs. An Investment Advisor’s Duty
Simply stated, a stockbroker pretends to be a confidential and trusted adviser but in reality is just a salesman. In response to complaints of inappropriate advice, brokers will claim they owe no formal duty to investment clients to act in their best interest. Instead, brokers argue that they only have to deal fairly with customers and observe a standard of care known as the suitability doctrine. Under this doctrine, brokers are charged only with understanding their client’s financial situation well enough that they can recommend suitable investments for that particular client. But the suitability rule does not require the broker to do what’s best for the customer. Thus, if a broker is be able to sell several similar investment products, any of which would technically be suitable for the customer, the broker can choose to recommend only the one that may be least beneficial for the customer but will pay the biggest commission to the broker.
This standard is very different from the fiduciary duty standard applicable to registered investment advisors. FINRA defines an investment advisor as “an individual or company who is paid for providing advice about securities to their clients.” Investment advisors (at least those not simultaneously acting as stock brokers by selling products) are paid for their experience and their guidance with respect to managing investment portfolios. Such advisors are legally obligated by the fiduciary duty standard to act in the best interest of clients, putting the clients’ interests first at all times. Investment advisers must provide advice and investment recommendations that they believe are best for their investor clients.
Further, advisers are required to observe the duties of loyalty and care. They must act without personal economic conflict, exercise good business judgment, and use ordinary care and prudence when handling an investor’s funds.
Do you believe that your stockbroker may have engaged in misconduct? If so, please contact our offices today to speak with a qualified attorney.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.