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5 Ways Financial Advisors Can Breach Fiduciary Duty


Fiduciary duty is a legal obligation of a person or entity to act in the best interest of another party, typically a client. In the context of a financial advisor, this duty requires them to prioritize the financial goals and interests of their clients above their own, even when it might be more profitable for them or their firm to suggest an alternative course of action. Therefore, it’s important to understand your fiduciary obligation to prevent a breach.

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How Fiduciary Duty Works for Financial Advisors

When creating an investment strategy for clients, advisors must consider their financial goals, risk tolerance and timeline. In doing so, they should not focus on investment options that could yield higher commissions for themselves. Moreover, if a conflict of interest arises where the advisor has a personal investment in a company that they’re recommending to a client, they must disclose this conflict. This disclosure is required under fiduciary duty.

Fiduciary duty is a legally enforceable obligation that applies to every interaction with clients and every decision made on their behalf. However, clients themselves can also take steps to ensure their advisors are adhering to this duty through regular communication, asking for full disclosures and understanding their rights as clients.

5 Ways Financial Advisors Breach Fiduciary Duty to Clients

A financial advisor looking up a code of ethics to identify potential breaches of fiduciary duty.

A breach of fiduciary duty can take various forms. Here are five ways that advisors can breach a fiduciary duty to their clients:

  1. Negligent management of assets: This refers to a situation where a financial advisor fails to manage a client’s assets with due diligence. Examples may include not diversifying investments, not monitoring market changes, or overlooking the client’s risk tolerance and financial goals. This negligence can potentially lead to substantial financial losses and undermine the client’s financial stability and future plans.
  2. Self-dealing: This can happen when the financial advisor puts their own best interest ahead of their client. Examples include making investments that benefit the advisor personally, using client funds for personal expenses, or accepting kickbacks from third parties. The impacts of self-dealing can be severe, including financial loss, damaged trust and potential legal action against the advisor.
  3. Inadequate record-keeping: Fiduciaries must provide advice and recommendations based on a thorough understanding of their clients’ financial situations. Inadequate record-keeping can make it challenging for an advisor to substantiate the rationale behind their recommendations and to prove that the advice was aligned with the client’s best interests.
  4. Misappropriation of assets: This can happen when an advisor takes client money without authorization for personal use. This involves embezzlement or the diversion of funds or property entrusted to a fiduciary, which constitutes in a violation of the fiduciary’s obligation.
  5. Undisclosed conflict of interest: If you’re making decisions for your clients that benefit you and don’t disclose the conflict of interest, then it could be a substantial breach of your fiduciary duty.

How to Prevent Potential Breaches of Fiduciary Duty

Taking a proactive approach to prevent a breach of fiduciary duty can help you maintain client trust and avoid legal consequences. These can include:

  1. Create clear policies and procedures: Establish comprehensive and transparent policies outlining fiduciary responsibilities and ethical conduct.
  2. Train employees: Conduct regular training sessions to educate employees about fiduciary duties, ethical standards and the consequences of breaches.
  3. Perform regular audits and reviews: Implement periodic internal and external audits to ensure compliance with policies, detect irregularities and deter potential breaches.
  4. Follow a code of ethics: Develop and enforce a code of ethics that promotes integrity, transparency and handling client assets responsibly.
  5. Develop conflict of interest policies: Clearly define and manage potential conflicts of interest through well-defined policies, disclosures and mechanisms for resolution.
  6. Get legal counsel: Seek legal advice to ensure that fiduciary practices comply with relevant laws and regulations, and consult legal experts in developing and updating policies.
  7. Get insurance coverage: Obtain appropriate insurance coverage, such as fiduciary liability insurance, to mitigate financial risks associated with potential breaches.

Bottom Line

A financial advisor reviewing policies and procedures designed to prevent potential breaches of fiduciary duty.

Fiduciary duty requires financial advisors to prioritize client interests above their own. Common breaches include negligent asset management or self-dealing, and can lead to severe consequences ranging from legal action to loss of reputation. Therefore, understanding your fiduciary duty can help you prevent potential breaches.

Tips for Growing Your Firm

  • If you’re looking for ways to connect with new clients, you may consider using an online lead generation service. SmartAsset AMP (Advisor Marketing Platform) is our holistic marketing service that financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
  • Another way to market yourself to potential clients is through digital marketing strategies. Consider these ideas to help you get started.

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