Securities laws require stockbrokers and brokerage firms to put your financial needs and best interests ahead of their own. When a stockbroker knowingly harms you in order to benefit himself, he has breached his fiduciary duty.
Before you can prove your stockbroker committed a breach of fiduciary duty, first you must prove that he was your fiduciary (i.e., that he was legally bound to act in your best interests). This is generally done by showing that your stockbroker gave you investment recommendations, bought and sold securities on your behalf or held the discretionary power to buy and sell investments without consulting you.
If your stockbroker did something dishonest relating to the above activities, or if he ever did anything to hurt you in order to benefit himself, you may be eligible for compensation under a claim for breach of fiduciary duty.
How Breach of Fiduciary Duty Happens
As of 2012, breach of fiduciary duty stock fraud claims was the most prevalent filed by defrauded investors on Wall Street. Breaches of fiduciary duty happen because a relationship of trust exists between a stockbroker and his customer. This fiduciary relationship is similar to the relationship between a doctor and his patient.
Under the law, both doctors and stockbrokers must act in a way that benefits their client. If a stockbroker purposefully harms his client in order to benefit himself, it’s a very clear example of a breach of fiduciary duty.
To illustrate how the fiduciary relationship works, imagine your surgeon said your life depended on a very expensive surgery. You’d probably get that surgery to preserve your life. Similarly, if your stockbroker told you that your retirement depended on a specific transaction, you’d probably agree to the transaction in order to preserve your life savings.
Now, imagine your surgeon was lying and putting your life at risk simply because he wanted to earn extra money by doing a pointless surgery. This would be the worst kind of fraud imaginable. However, it would be extremely easy for a crooked doctor to do.
A stockbroker could easily take advantage of his customer’s trust, and endanger his customer’s life savings, simply to fill his own pockets with money.
Laws exist to prevent dishonest stockbrokers from violating their fiduciary obligation to you. And depending on your level of investment experience and the contractual relationship between you and your broker, your broker may owe a higher or lesser level of fiduciary duty to you.
Fiduciary duties are generally considered “heightened” when you place a greater degree of trust in your stockbroker. Here are some examples of situations where a stockbroker has a higher level of fiduciary obligation to you:
- If you are an inexperienced investor, you are more vulnerable to fraud. In such cases, the stockbroker’s fiduciary relationship is sharper and more defined. A stockbroker must take extra care to give suitable investment advice to an inexperienced investor.
- If you sign papers to give your stockbroker the ability to buy and sell investments in your account without consulting you first (i.e., management or ‘discretionary’ authority), you have put full trust in your stockbroker’s honesty and integrity. For that reason, the fiduciary relationship is very strong.
If you’re using a discount brokerage account, the fiduciary obligation owed to you is typically less extensive. However, even when a case involves experienced investors or non-managed accounts, if a broker is making transactions on your behalf, a breach of fiduciary duty can occur.
Mom and pop investors and highly sophisticated investors alike can fall prey to the wiles of a dishonest stockbroker. The most common breaches of fiduciary duty might happen like this:
- An investment advisor recommends (or purchases) a risky or unsuitable investment for a conservative investor or senior citizen simply because it pays him a very large commission.
- A brokerage firm prints positive research and “buy” ratings on an investment even though it’s worthless – simply because the firm will benefit from selling it to its customers.
- A brokerage firm aggressively sells its in-house investment products to customers instead of more suitable and/or affordable investments.
- A stockbroker churns (or engages in excessive and pointless trading) in order to generate fees and commissions for himself.
- An investment advisor sells an annuity to a senior citizen who needs liquid assets and can’t afford to lock away her retirement savings.
- A stockbroker or brokerage firm recommends an investment that the broker or firm has an interest in.
- Any action, no matter how small, that causes you harm while benefiting your broker.
Investors Take Care: These Investments Could Be Dangerous!
Recently, stockbrokers have been recommending that conservative investors buy difficult to understand, high-risk and “designer” investment products (including Limited Partnerships, Annuities, Structured Notes, Reverse Convertible Bonds, REITs, ETFs, and more). Many brokers are misrepresenting these investments as safe, secure and appropriate for retirement income generation.
The truth is, the average investor typically can’t understand the dangers and complexities involved with these investments. Evidence shows that many of them perform badly, lock up your money for years, cause devastating financial losses and are not worth the high fees that are associated with them. Nevertheless, brokers market them to conservative investors because of the commissions they’ll earn from making the sale.
Click on any fraud category on this website to learn more about the ways a breach of fiduciary duty can occur.
Bringing Fiduciary Duty into Perspective
On Wall Street, where big business is shrewd, competition is cutthroat and CEOs have questionable morals, the temptation for fraud and the idea that “everybody is doing it” abound at brokerage firms.
Numerous schemes and complex strategies exist by which stockbrokers and brokerage firms breach their fiduciary duties to their customers. Even worse, there are many more dishonest tactics that have yet to be discovered or even imagined.
General and wide-sweeping laws relating to ‘breach of fiduciary duty’ and ‘omission and misrepresentation’ exist to protect investors from unknown and unthinkable acts of fraud. Imagine if these laws were followed, if brokers always acted in your best interest and never misrepresented or concealed important information from you. Investment fraud would be non-existent.
However, the way Wall Street brokerage firms are organized and the way they compensate their stockbrokers creates a breeding ground for fraud. Some brokerage firms have a ‘culture’ that makes dishonesty and deception the norm. Others make it virtually impossible for their brokers to keep their jobs without breaching their fiduciary obligations.
The following points illustrate the biggest reason why breaches of fiduciary duty abound:
- There is enormous stress put upon your stockbroker by his brokerage firm to ‘make the sale’ and generate commissions.
- Most stockbrokers have benchmarks and sales goals to reach.
- If a stockbroker doesn’t meet his quotas, he could lose his job. If he exceeds them, he will be compensated with lucrative bonuses and rewards.
A dishonest and unscrupulous investment advisor with a talent for gaining someone’s trust can use deception and lies to thrive in the commission-based environment of the investment industry. But even the most honest of stockbrokers can cave under pressure when faced with the potential of losing his job and the need to feed his family.
Discovering Fiduciary Duty Fraud
The majority of fiduciary breaches go unnoticed. Usually, this is because the breach of fiduciary duty didn’t result in a financial loss or the harm was so small that nobody noticed.
If a stockbroker unsuitabley invests a senior citizen’s life savings into a dangerous portfolio of junk bonds, it’s probably a breach of fiduciary duty. If the gamble pays off, the senior citizen will never realize there was a problem. On the other hand, if she loses 85% of her retirement, she and her family will start asking questions.
It’s much wiser to ask these questions and know your investment portfolio inside and out before you encounter serious problems. Nevertheless, here are some ways you might confirm a breach of fiduciary duty if you suspect there’s an issue:
- Have an independent accountant or a fee-based financial planner review your investments. A fee-based planner will charge you an hourly rate. He can give you a completely honest and unbiased opinion.
- Watch out for unusual trading activity in your account. If something doesn’t look or feel right, it could be a problem.
- Make sure that you fully understand the negative points relating to any investment recommended to you. A broker often spends five seconds describing risks, and 30 minutes describing the benefits. Carefully listen to his words. It’s often what is not said that is the most dangerous.
- Make sure you diligently investigate anything on your account statement that looks questionable. When your life savings are at stake, no amount of care is too much.
- Take your financial statements to a reputable stock fraud attorney and ask for a detailed review. A stock fraud attorney can tell very quickly if your broker has been acting with honesty and integrity.
Know Your Rights
In cases that involve a breach of fiduciary duty, state, federal and FINRA (Financial Industry Regulatory Authority) rules and regulations factor heavily in a victim’s arguments.
One notable law is known as the ‘SEC Shingle Theory.’ It basically, says that if a stockbroker ‘holds his shingle out’ (or presents himself) as an investment advisor, he must act in your best interest. To summarize a famous 1949 ruling on the law, the Shingle Theory says:
If a broker wins over your trust so that you believe he’s the expert, he must disclose to you any benefits he’s going to receive from his actions. Those benefits could include bonuses, commissions, and fees.
Investors must be careful. Just because laws exist to protect you doesn’t mean your broker is following them. Defrauded investors must fight back to preserve their rights under the law.
Do you suspect your financial loss was caused by a breach of fiduciary duty?
Try and Get Your Money Back
If you suffered investment declines due to the fraudulent actions of your stockbroker or brokerage firm, you deserve financial compensation. Victims may qualify for a full or partial refund of the original amount invested, in addition to other compensation.
While financial damages can be economically crippling, the realization you were lied to and played for a ‘sucker’ can be emotionally devastating. If you have fallen victim to a breach of fiduciary duty, it’s important to remember this is not your fault!
Pursuing a stock fraud claim will teach Wall Street brokerage firms it’s unacceptable to prey upon innocent consumers. Your claim may even prevent others from suffering as you have by forcing Wall Street brokerage firms to conduct business with honesty and integrity.
You may be eligible to receive compensation regardless of whether you sold or continue to hold the securities at issue. Contact us today to set up a free consultation. We will listen to your story, answer any questions you may have and discuss your legal rights and options.