5 Ways Financial Advisors Can Breach Fiduciary Duty (and How to Avoid Them)

Fiduciary duty requires financial advisors 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. Breaching fiduciary duty can be costly for your firm. In 2025, the SEC filed 456 enforcement actions resulting in $17.9 billion in orders for monetary relief, some of which involved breach of fiduciary duty by investment advisors. Penalties aside, a breach of fiduciary duty can result in damage to your firm’s brand reputation, potentially costing you clients and business. Understanding how these breaches can occur is the first step in preventing them. ¹

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What Are the Ways Advisors Can Breach Their 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 Asset Management

This refers to a situation where a financial advisor fails to manage a client’s assets with due diligence. This negligence can potentially lead to substantial financial losses and undermine the client’s financial stability and future plans.

For example, an advisor may neglect to conduct regular annual portfolio reviews for a retirement-focused client. Over time, the client’s asset allocation drifts away from their preferred 60/40 allocation to a 90/10 allocation that’s heavily weighted toward stocks. Meanwhile, they’ve gotten closer to retirement with each passing year.

The year they’re due to retire, the market experiences a significant downturn. Because their portfolio is heavily exposed to stocks, they take a 40% hit, leaving them well short of their target retirement goal. The advisor’s mismanagement is a breach of fiduciary duty, as they failed to take adequate steps to monitor the portfolio and exercise due care.

2. Self-Dealing

Self-dealing occurs when the financial advisor puts their own interests ahead of their client’s. Examples include making investments that benefit the advisor personally, using client funds for personal expenses, or accepting kickbacks from third parties.

For example, say a client inherits a windfall worth six figures. They bring the money to you and ask you to invest it in an index fund that’s moderately risky. Rather than following their directive, you invest the money into a proprietary fund that pays you a hefty commission. You’ve breached fiduciary duty by not placing the interests of your client above your own.

3. Inadequate Recordkeeping

Fiduciaries must provide advice and recommendations based on a thorough understanding of their clients’ financial situations. Inadequate record-keeping and archiving 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.

Recordkeeping failures may be the result of poor organization rather than any deliberate ill intent. For example, you might switch up some of the portfolio or client management software tools included in your tech stack. Changing programs without backing up client data or manually verifying that all required information has carried over can result in recordkeeping gaps.

You may not realize what’s happened until a question arises about a client account. That could be damaging to clients, particularly if lost records pertain to their tax filing. A client who gets hit with a massive tax bill as a result of your failure to maintain adequate records is not likely to remain your client for long.

4. Misappropriation

Misappropriation happens 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 a violation of the fiduciary’s obligation. It can also be treated as a criminal offense.

In 2025, a former financial advisor was sentenced to 32 months in federal prison for wire fraud after he stole $531,411 from a client’s trust account over a six-year period. The assistant U.S. attorney in the case wrote that the advisor didn’t just steal the client’s money, “he violated the victim’s trust.” ²

5. Undisclosed Conflicts 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. Examples of potential conflicts of interest you must share include:

• Use and recommendation of proprietary investment products
• Revenue-sharing agreements with custodians, clearinghouses and other entities
• Receipt of sales commissions when recommending specific products
• Affiliations with brokerage firms or custodians
• Dual registration status if you operate as both an RIA and a broker-dealer
• Secondary roles you assume, such as working as an independent insurance agent
• Personal trading policies

When disclosing conflicts of interest, avoid vague wording. Be clear and transparent about where these conflicts exist and how your business manages them.

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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. Steps may 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 responsible handling of client assets.
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.

Frequently Asked Questions (FAQs)

Bottom Line

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.
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