Some financial professionals owe a fiduciary duty to their clients. All investment advisers are required to be fiduciaries by law, and stockbrokers may be fiduciaries depending on the circumstances – even though those same brokers must act in the client’s best interests (which is akin to a fiduciary duty). So what is a fiduciary duty anyway?
Fiduciaries are legally obligated to act in the best financial interests of their clients. In English, that means the clients’ interests come ahead of the financial professional’s. While most fiduciaries abide by their legal and professional duties, some violate the trust of their clients by failing to act in their best interests or even outright defrauding them of their funds.
Victims of such breaches of fiduciary duty have legal rights. At McCarthy, Lebit, Crystal & Liffman Co., LPA, our securities and investment fraud attorneys help our clients take legal action against financial professionals who have committed a breach of fiduciary duty. If you are in this difficult situation, you can learn more about your legal options by contacting our firm at (866) 932-1295.
What Is Fiduciary Duty?
A fiduciary can be any person or organization acting on behalf of another person, who has a legal obligation to act in the best interests of that person. A fiduciary holds a special relationship of trust and confidence with another.
Some of the most common business relationships that involve fiduciary duties include:
- Trustees and beneficiaries
- Corporate board members and shareholders
- Executors of wills and heirs
- Guardians and wards under their care
- Lawyers and clients
- Investment advisers and clients
According to the Consumer Financial Protection Bureau (CFPB), fiduciaries owe four main duties to their clients:
- Always act in the best interest of the client;
- Manage the client’s assets or funds carefully;
- Keep the client’s funds and property separate from those of the fiduciary and other clients; and,
- Maintain full and accurate records of the client’s money and property.
Examples of Breach of Fiduciary Duty
A breach of fiduciary duty occurs when a party trusted to manage the assets of another party fails to act in the best interest of this other party, thereby violating their legal obligations. Such breaches can take many forms. Here are some of the most common breaches our securities and investment fraud lawyers see in our cases.
Self-Dealing
A fiduciary is guilty of self-dealing if they prioritize their interests over the interests of their clients. Most commonly, that occurs when the financial professional recommends an investment or strategy that benefits themselves first and any potential benefit to the client is secondary. Such recommendations are the result of undisclosed conflicts of interest and serve to undermine the trust and confidence placed in the fiduciary. The client may be able to take legal action and pursue compensation for damages suffered.
Misuse of Company Assets
In a corporation, the Board of Directors has a great deal of power, including the authority to handle the company’s assets and funds. Misuse of company assets is a common breach of fiduciary duty committed by directors who use company funds, resources, or property for personal gain. This type of breach can have major financial consequences for the company and ultimately the wrongful directors themselves.
Misrepresentation or Omission of Material Facts
Brokers and financial advisors may breach their fiduciary duty by providing misleading information or omitting material details about investments or financial strategies. Failure to disclose pertinent facts can lead to misinformed investment decisions, financial losses, and potential legal disputes. A commitment to full and accurate disclosure of information is crucial in building trust, maintaining the integrity of the client-advisor relationship, and ensuring that the client’s best interests are protected.
Churning and Excessive Trading
Churning occurs when brokers excessively trade securities in a client’s account to produce additional commissions, prioritizing the broker’s financial gain over the best interests of their client. Excessive trading results in unnecessary fees and the depletion of the client’s investment portfolio. In addition to these direct consequences, churning can create an unnecessarily large tax liability for the client.
Failure to Diversify Investment Portfolios
Absent rare circumstances, fiduciaries must diversify their clients’ investment portfolios, since diversification is well understood to limit risk and volatility. By holding a variety of different investments, the overall well-being of the portfolio is not put at risk due to poor performance from one investment or asset category. Neglecting to diversify investments can jeopardize the client’s current financial status and long-term financial goals.
Who Can Be Held Liable For a Breach of Fiduciary Duty?
Various parties can potentially be held liable for a breach of fiduciary duty, depending on the specific circumstances of the case. Not all fiduciaries who give clients bad financial advice are guilty of a breach. The question is whether the advice given was well-informed but didn’t work out, or whether the advice lacked any sound basis when it was given.
Fiduciaries – such as trustees, financial advisors, company directors, and board members – may be held liable for failing to act in the best interests of those for whom they work. In addition, co-fiduciaries or those who collaborate with the primary fiduciary and contribute to the breach can also share liability.
Third parties that contribute to or facilitate the breach of fiduciary duty can also face legal repercussions and be held responsible for any resulting damages or losses, even if they did not directly owe a fiduciary duty to the individual or entity that suffered those damages or losses.
Proving Damages in a Breach of Fiduciary Duty Case
Suppose you believe that you are a victim of a breach of fiduciary duty. In that case, you and your securities and investment fraud lawyer must prove four criteria to file a successful lawsuit and recoup losses:
- The defendant owed you a fiduciary duty;
- The defendant violated this fiduciary duty by failing to act in your best interests;
- You suffered financial losses; and,
- Your financial losses were directly caused by the breach of fiduciary duty.
Arbitration, on the other hand, may have a more relaxed standard since arbitrators sit in equity, not in law. We’ll spare you the legal technicalities, but in short: arbitrators have the unique ability to set things right, so long as they don’t make a decision that runs afoul of the law. Arbitrators tend not to get bogged down in the technicalities of proving elements of particular claims, as courts and juries do.
Taking legal action for a breach of fiduciary duty is an incredibly complex process. Thus, in most cases, hiring an experienced securities and investment fraud attorney who understands how this process works and how to prove your claim is advisable.
What Damages Are Available For Breach of Fiduciary Duty?
If you are a victim of a breach of fiduciary duty, you may be eligible for various forms of damages, including:
- Lost investment profits,
- Out-of-pocket losses, and
- Punitive damages where the breach was intentional and meant to cause harm.
Determining which damages are available is complex and depends on the unique circumstances of the case. To get an accurate estimate of the damages you could recover, it is generally best to discuss your case with an experienced investment fraud lawyer.
Learn More From Our Securities and Investment Fraud Lawyers
Have you suffered investment losses due to a breach of fiduciary duty by a broker, financial advisor, or another trusted financial professional? You may have grounds for a breach of fiduciary duty lawsuit against a broker, financial advisor, or another type of fiduciary. At McCarthy, Lebit, Crystal & Liffman Co., LPA, our dedicated securities and investment fraud lawyers represent people in your situation, helping them recoup their losses and all other relevant damages. Contact us today at (866) 932-1295 to learn more about your legal options.
More Information
- Why Hire a Securities Attorney?
- How Much Does a Securities Attorney Charge?
- Other Common Examples of Securities Fraud
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.
