Fiduciary Duty Means Following Prudent Investment Practices
The term “fiduciary” is inclusive of people who have the legal responsibility for managing someone else’s money; this includes investment committees of retirement plans, trustees of private trusts and investment advisors. In general, a fiduciary must act for the benefit of the individual to whom they owe fiduciary duties, to the exclusion of any contrary interest. Among the legal duties commonly imposed on fiduciaries are duties of good faith and candor (a duty to disclose on a voluntary basis all material information).
Fiduciary status is determined by a number of facts and circumstances, but generally is defined as a person who manages property/financial funds for the benefit of another, who exercises discretionary authority or control over assets and/or acts in a professional capacity of trust regarding investment advice.
A broker with discretionary authority has the client’s authorization to make investments for the client without consulting the client. If the broker has this discretionary authority or “control” over an investor’s account that person may owe the investor a fiduciary duty. A fiduciary duty imposes a duty on the broker to use extra care in making investment decisions and in managing the overall account for the investor.
Fiduciary liability is not determined by investment performance, but rather by whether prudent investment practices were followed by the investment advisor. However, because of the degree of trust reposed in a fiduciary, a fiduciary is generally held to a very high standard of honesty and integrity within the scope of the relationship. Following Security Exchange Commission (SEC) regulations/guidelines, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees and any conflicts of interest. Brokers must exercise discretion in selecting investments, with only their clients’ best interests in mind, including assessing the client’s tolerance for risk and ultimate financial goals.
To decide whether the broker should be held liable for advice, it is necessary to determine whether the investment advice was suitable for the client and whether the investment professional, bound to a fiduciary duty, acted in the client’s best interests. All investment advisors should ask clients for complete documentation that outlines their risk profile and investment goals. Then the advisor is duty-bound to help ensure that the investment choices selected remain consistent with the outlined and agreed profile and goals.
If any investment advice provided by a broker, that a client believes caused losses because it was inappropriate according to their personal investment profile/goals, should immediately contact legal advisors for guidance and direction. Investors may be compensated for losses if it is proven that the broker’s suggestions were not within the specifications included in the risk profile, and/or that the financial risks involved were not disclosed.
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