Investment advisors have a fiduciary duty to their clients. A fiduciary duty is a legal obligation of the highest degree for one person to act in another person’s best interests. Advisors who breach this duty can be subject to financial and professional liability. If you are an investment advisor facing allegations that you breached your fiduciary duties, you should consult counsel with a depth of knowledge about the financial and securities industries who can advise on a strategic defense. Likewise, if you believe your investment advisor’s breach of fiduciary duty caused you economic harm and losses, you should consult an attorney knowledgeable in this area to evaluate whether you have a claim against the advisor.
Not all financial professionals are fiduciaries, but any advisor who is registered with the U.S. Securities and Exchange Commission (SEC) is a fiduciary. Investment advisors who are registered with a state securities regulator are also fiduciaries. The Investment Advisors Act of 1940 codifies an advisor’s fiduciary duty to his or her clients. On the other hand, insurance agents and investment brokers are not fiduciaries, and do not owe as high of a duty of care to their clients. Increasingly, individuals act as investment advisors even though they are unlicensed. For example, a friend or acquaintance might agree to manage your investments and make promises about how those investments will be handled and what returns you can expect. These less formal advising relationships can still give rise to fiduciary duties depending on the specific facts of your case, which should be analyzed by a knowledgeable attorney.
Fiduciaries are held to a higher standard of care and good faith when providing services to their clients. It is not uncommon for clients who are disgruntled due to a failed investment or financial loss to claim that an advisor breached their fiduciary duty simply because they are dissatisfied with the outcome. However, to prevail in a claim of breach of fiduciary duty, the client or former client must prove an actual breach, which was the direct and actual cause of damages. These claims must generally be proven by a preponderance of the evidence, a legal burden of proof that means more likely to than not.
Duty: The plaintiff must prove that a fiduciary relationship existed between the advisor and the plaintiff. Typically, this element will be satisfied by the plaintiff producing a service agreement between the advisor and the client. If no such relationship existed, the advisor may be able to get the case dismissed early. If a fiduciary relationship did exist because the advisor provided investment advising services, then the plaintiff will be able to establish that the advisor owed a certain standard of care when providing the investment advisory services. This standard of care is to act in the client’s best interests rather than the advisor’s own interests, and to act as a reasonably prudent advisor with that advisor’s experience under the circumstances.
Breach: The plaintiff must then prove that the advisor’s conduct fell below this standard of care, resulting in a breach of fiduciary duty. There are multiple scenarios in which an investment advisor’s actions or lack of action can amount to a breach.
Examples include initiating a transaction for the advisor’s own benefit, failing to recommend suitable investments, acting with a conflict of interest, failing to act promptly, acting without authorization, failing to inform the client of the risks of an investment or any other material fact of an investment or transaction, misrepresenting a material fact, churning (i.e., engaging in excessive trading to generate commissions), failing to give advice consistent with the client’s risk tolerance and objectives, and failing to diversify investments.
Causation: The plaintiff must prove that the breach of duty was the actual cause of the harm the plaintiff suffered, rather than some other intervening cause. Even if the advisor failed in the advisor’s duties to the client in some way, if that breach did not cause the client any harm — but rather some other unforeseeable market influence did — then there is no causation, and the advisor cannot be held liable for the resulting damages.
Damages: Finally, the plaintiff must prove the claimed damages. If damages are speculative, counsel for the advisor may be able to challenge the claim as fundamentally flawed.
If you are accused of breaching your fiduciary duty as an investment advisor, your professional career and reputation are on the line. The facts giving rise to a breach of fiduciary duty claim are usually much more complex than a typical negligence claim and require a deep investigation of the decisions you made, how those decisions impacted your client’s outcome, and any other external factors that contributed to or caused your client’s negative outcome. For the same reasons, if you believe that you have been harmed because your advisor breached a fiduciary duty, you should consult knowledgeable counsel who can evaluate the strength of your potential claim and help you protect your rights and decide whether to pursue recovery of damages.
At Delahunty & Edelman, our attorneys have experience in matters concerning breaches of fiduciary duty related to financial investments. We are well-equipped to investigate contributing and intervening factors that impacted the client’s situation, and to handle your case in the most efficient and cost-effective manner possible. For more information about how we can help you, please contact us to set up a consultation.
Patrick Delahunty is a former federal prosecutor with deep experience in resolving disputes. He advises individuals and companies in complex criminal, regulatory, and commercial litigation.