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Here's how to tell if a breach of fiduciary duty has occurred.

When working with a financial advisor to manage your money, it’s important to know whether they’re required to uphold a fiduciary duty to their clients. Being a fiduciary means advisors are obligated to act in the best interests of the investors they serve. When a breach of that duty happens, it’s important to understand what rights you have and how to protect yourself financially.

Meeting the Fiduciary Duty Standard

To understand whether a breach of fiduciary duty has occurred, it’s helpful to know what the fiduciary standard involves. In a nutshell, it means advisors must meet certain ethical standards when assisting clients. Advisors are responsible for:

  • Acting in the client’s best interests at all times
  • Using accurate and complete information when offering investment advice
  • Avoiding conflicts of interest and disclosing them if and when they arise
  • Not using client assets to benefit themselves in any way
  • Being transparent in disclosing how fees are charged for services
  • Generally exercising a duty of loyalty and care when managing client portfolios

The fiduciary duty rules apply to registered investment advisors who are regulated by the Investment Advisers Act of 1940. But it’s important to note that a fiduciary relationship can exist in other financial relationships, too.

For example, if you establish a trust and name a trustee to manage its assets, the trustee would be considered a fiduciary. If you’re buying a home, your real estate agent has a fiduciary duty to act in a way that’s to your benefit. In these scenarios, you’re relying on the trustee or agent to act with prudence, good faith, confidentiality and candor.

How a Breach of Fiduciary Duty Can Happen

Here's how to tell if a breach of fiduciary duty has occurred.

Generally, a breach occurs when your investment advisor does something that goes against the guidelines established under the fiduciary standard. In an investment advisor relationship, examples of a breach might include:

  • Steering you toward an investment that doesn’t fit your overall strategy or needs solely to earn a commission
  • Advising you to invest in something without providing you with all of the relevant information you need to make a decision
  • Making inaccurate or incorrect statements about a security to encourage you to invest
  • Deliberately misleading you about investment services, products or fees
  • Making excessive trades from your account to earn commissions
  • Trading investments without your authorization
  • Using the money in your investment account to buy securities for themselves
  • Failing to disclose any conflicts of interest associated with an investment
  • Acting negligently or recklessly when making investment decisions

What Can You Do If Your Fiduciary Breaks the Rules?

If you think your advisor breached their fiduciary duty in any way, your first action may be to end the relationship and find a new advisor. Beyond that, however, you may be able to file a civil claim for damages if the breach stemmed from negligent action on the part of your advisor.

An attorney can help you determine whether you have standing to make a claim for negligence or fraudulent activity. In order for there to be a breach from a legal perspective, three criteria need to be met.

1. Fiduciary Status

You’ll have to prove that your advisor is indeed a fiduciary and had a certain duty to act in a way that was in your best interest at the time the questionable behavior occurred.

2. Proof of the Breach

You and your attorney will need to be able to show evidence of what occurred to cause the breach. The scope and duties of the fiduciary relationship need to be clearly defined, too. This is where having good electronic or paper records becomes important. Emails can be used to show evidence of a breach.

3. Damages

The third part of the puzzle is damages. You have to be able to prove that your advisor’s actions harmed you in some way. That might include showing how their investment advice or strategy caused you to lose money in the market, or proving that you paid excessive fees that you shouldn’t have, based on their advice.

If one part of the equation is missing, you may not have legal standing to file a civil claim against your advisor for fraud or negligence. Losing money alone from a poor stock or mutual fund investment isn’t enough to bring a case. In other words, you have to be able to connect the dots between the advisor’s actions and any losses you suffered financially.

One thing to check for before filing a lawsuit is an arbitration clause in your investment agreement. If you signed the agreement from your advisor and it includes an arbitration clause, you may be required to go through FINRA-regulated arbitration in lieu of going to civil court. The good news is that if the arbitration outcome swings in your favor, you may be entitled to monetary compensation.

What Damages Are You Entitled To If You Win Your Case?

Here's how to tell if a breach of fiduciary duty has occurred.

The answer to this largely depends on what your state laws are regarding negligence or fraud claims involving financial advisors. For example, you may be limited as to how much money you can sue for. But generally, you may be able to file a claim for lost profits, out-of-pocket losses, mental anguish caused by the breach and/or punitive damages.

The amount you could receive from FINRA arbitration also varies. Between 2012 and 2016, a small percentage of investors were awarded damages, while 69% were finalized via a settlement agreement.

The Bottom Line

Protect yourself against a fiduciary breach of duty by knowing who’s managing your investments. Asking the right questions, such as what the advisor’s investment strategy is and how they’re compensated, is important during the screening process. Once you choose an advisor, read over your investment agreement carefully to understand whether they follow a fiduciary duty and what recourse you have if they breach that duty.

Tips for Investors

  • Take time to carefully review the fee structure for any advisor you choose to work with. Fee-based advisors make their money by recommending certain investment products and earning commissions on sales. A fee-only advisor, on the other hand, operates using a different fee structure that’s based on the services they offer. Ask upfront for a complete fee structure so you understand exactly what you’re paying for.
  • Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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