Breach of Fiduciary Duty Lawyers — Bakhtiari & Harrison

The fiduciary duty — who owes it and what it requires

Not all financial professionals owe a fiduciary duty. The standard that applies depends on how the financial professional is registered and how they are compensated:

• Investment advisers (RIAs): owe a full fiduciary duty to their clients under the Investment Advisers Act of 1940 — the highest standard of care in financial services. RIAs must act in the client’s best interest, disclose all material conflicts of interest, and avoid self-dealing.
• Broker-dealers (post-Regulation Best Interest): effective June 2020, broker-dealers must act in the retail customer’s best interest under Regulation Best Interest — a standard approaching but not identical to the fiduciary duty. Reg BI prohibits brokers from placing their own interests ahead of the client’s.
• Dual registrants: many financial professionals are registered as both broker-dealers and investment advisers. The applicable standard depends on the capacity in which they are acting for any given transaction.

Common breaches of fiduciary duty

• Self-dealing: recommending investments in which the adviser has an undisclosed personal financial interest — directing client assets to funds, products, or transactions that benefit the adviser at the client’s expense.
• Undisclosed conflicts of interest: failing to disclose material conflicts — including compensation arrangements, revenue sharing, referral fees, and ownership interests — that could influence investment recommendations.
• Failure to act in the client’s best interest: recommending more expensive or less suitable investments when equivalent or better options are available at lower cost — particularly when the more expensive option generates higher adviser compensation.
• Misappropriation and self-dealing: directing client assets to the adviser’s own accounts or businesses without authorization.
• Failure to disclose material information: withholding information about investment risks, fees, or the adviser’s own regulatory history that a client would consider important.

Fiduciary duty and RIA regulation

RIAs are subject to SEC oversight (for advisers with over $100 million in AUM) or state oversight (for smaller advisers) under the Investment Advisers Act of 1940. The SEC has articulated the fiduciary duty as encompassing both a duty of care — to provide advice that is in the client’s best interest — and a duty of loyalty — to eliminate or disclose and obtain consent to conflicts of interest. When an RIA breaches either component of the fiduciary duty, investors may pursue claims in court, AAA arbitration (if the advisory agreement requires it), or FINRA arbitration (if the RIA is also FINRA-registered).

Frequently asked questions — breach of fiduciary duty

How do I know if my financial adviser owes me a fiduciary duty?

If your adviser is registered as an investment adviser (RIA) — whether with the SEC or your state — they owe you a fiduciary duty. Broker-dealers who are not also registered as investment advisers are subject to Regulation Best Interest rather than the full fiduciary standard. Many advisers hold both registrations. Bakhtiari & Harrison determines the applicable standard as part of its initial case evaluation.

What evidence is needed to prove a breach of fiduciary duty?

Key evidence includes: the adviser’s registration and compensation disclosures (Form ADV), internal communications showing awareness of conflicts, investment recommendations compared to the client’s stated objectives, evidence of self-dealing or undisclosed conflicts, and expert testimony on the applicable fiduciary standard and whether the adviser’s conduct met it.

Can I bring a breach of fiduciary duty claim in FINRA arbitration?

Yes, if the adviser is FINRA-registered. Many RIAs are also registered broker-dealers and are subject to FINRA jurisdiction. If the RIA is not FINRA-registered, claims may be brought in court or AAA arbitration depending on the advisory agreement. Bakhtiari & Harrison evaluates the appropriate forum in the initial consultation.

For a full overview of the firm’s investor representation practice, visit the Advisor Misconduct page.

Contact a breach of fiduciary duty lawyer — free consultation

Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys review every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.

Investor cases are handled on a contingency fee basis — no recovery, no fee.

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Courts Impose a Fiduciary Duty on Brokerage and Advisory Firms Managing Client Money

Courts, including those in California have reiterated that the fiduciary nature of the relationship between a stockbroker and customer “imposes on the former the duty to act in the highest good faith toward the customer.”

A fiduciary duty also requires a brokerage firm to comply with industry standards, rules, and regulations. The duty also requires brokerage firms to supervise and monitor the activities of the firm’s employees, perform pre-sale due diligence and after-sale monitoring of investments. The failure to meet the firm’s obligations can be a breach of the firm’s fiduciary duty and result in liability.

Recently, the Securities and Exchange Commission’s Regulation Best Interest known as “Reg BI” imposed a heightened best interest standard on broker-dealers when recommending securities transactions or investment strategies. Broker-dealers were required to begin complying with the regulation on June 30, 2020. Fiduciary duty lawyers at Bakhtiari & Harrison represents clients in FINRA arbitration.

Regulation BI known as The Best Interest Standard

Regulation Best Interest—or Reg. BI—imposes a new standard of conduct specifically for broker-dealers that substantially enhances their obligations beyond the current “suitability” requirements. The Regulation BI standard can be viewed as having two components. First, it establishes a general obligation that draws from key fiduciary principles, requiring broker-dealers to act in the best interest of their retail customers and not place their own interest ahead of the retail customer’s interest. Fiduciary duty lawyers at Bakhtiari & Harrison represents clients in FINRA arbitration where this is a key claim for recovery. Second, it includes specific requirements to address aspects of the broker-dealer relationship where our experience indicated that focused attention was appropriate. Regulation BI is satisfied only if the broker-dealer complies with four specified component obligations: Disclosure, Care, Conflict of Interest, and Compliance. Each of these obligations includes a number of prescriptive requirements, all of which must be satisfied to comply with the rule. Fiduciary duty lawyers will raise these claims and elements of proof with arbitrators.

ERISA Also Imposes Fiduciary Duties on Brokerages and Advisors Managing Client Assets

Wall Street firms may also have statutory fiduciary duties. The most common is codified in The Employee Retirement Income Security Act (ERISA) contains four requirements for 401(k) plan fiduciaries often referred to as the obligation to operate plans for the “exclusive benefit” of the participants. These requirements are the duty of loyalty; the duty of prudence, the duty to diversify investments; and the duty to follow plan documents.

These are some examples of ways a financial adviser can comply with the fiduciary duty. Behavior that places some other interest above the client’s interest may be considered a breach of the fiduciary duty.