Breach of Fiduciary Duty

A fiduciary relationship is a special relationship where someone in a position of trust over the affairs of another person (the fiduciary) agrees to act in the best interests of that person to the exclusion of all else (including the fiduciaries’ own interests). It has been said that the fiduciary must put the client’s interests first at all times, and must take active steps to ensure that the client’s interests are protected. Attorneys are always held to a fiduciary standard, and increasingly, so are financial advisors.

Other than claims for suitability, no other cause of action is asserted more in FINRA arbitrations than breach of fiduciary duty. This is due to the fact that most customer broker relationships entail a high degree of trust reposed on the part of the customer in the relationship, based in most cases on the perceived expertise possessed by the broker dealer and its investment research department.

Many states, California and Nevada in particular, impose a fiduciary duty on the part of “stockbrokers” and financial planners in their dealing with customers. One of the first cases to discuss fiduciary duty in the context of a broker-customer relationship was Twomey v. Mitchum, Jones & Templeton, Inc. 262 Cal.App.2d 690, 69 Cal.Rptr. 222 (1968).

The court in Twomey looked at the hypothetical case of the “sweet trusting widow” who wanted to engage in speculative stock purchases: The Court found that a:

“stockbroker has a fiduciary duty (1) to ascertain that the investor understands the investment risks in the light of his or her actual financial situation; (2) to inform the customer that no speculative investments are suitable if the customer persists in wanting to engage in such speculative transactions without the stockbroker’s being persuaded that the customer is able to bear the financial risks involved; and (3) to refrain completely from soliciting the customer’s purchase of any speculative securities which the stockbroker considers to be beyond the customer’s risk threshold.”

Twomey was followed by a series of cases in California, and other states soon followed with their own court and administrative decisions that stand for the proposition that a financial planner owes a fiduciary duty to his or her client. Securities attorneys are largely responsible for blazing this trail on behalf of investors. While not every relationship will require a blanket duty of protection, particularly if the customer has indicated that he or she can fend for themselves, the concept remains that a financial planner must make investments recommendations consistent with his or her client’s needs and objectives (suitability- a sort of fiduciary duty light).

This expectation on the part of the client, that the brokerage firm stands as a mighty guardian of an investor’s interests has been constructed not only through court decisions, but via hundreds of millions of dollars of ad campaigns targeting “mom and pop” investors. Television, internet and radio ads tout the special treatment clients get; the access to customized financial planning, and the peace of mind that comes with reposing your retirement nest egg in the hands of the caring financial institution. Unfortunately this image is very much at odds with the lobbying efforts of the major Wall Street banks, who strenuously objected to the fiduciary duty rule proposed by the Labor Dept. that would have applied to the handling of retirement accounts. To the public, Wall Street says: “put your full faith and trust in us”; to Congress, Wall Street says: “Don’t hold us to that standard.” Securities attorneys have been fighting on behalf of investors to have this rule applied to all relationship between customers and FNRA licensed brokers, but it appears for now that wall street has successfully limited its scope.

The Law Office of David Liebrader practices exclusively in the field of investment loss recovery. For the past 23 years, we have dedicated our law practice to assisting investors who have been victims of investment fraud via fraudulent and unsuitable investment transactions. During that time we have recovered money for over one thousand individuals, pension plans, trusts and companies. The recoveries we have obtained via judgments, awards and settlements on behalf of our clients exceed $40,000,000.

If you suspect that you have been the victim of investment fraud, or had a financial advisor recommend unsuitable investments to you, call us today for a free, confidential consultation at 702-380-3131.

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