What is Fiduciary Duty?

Does your stockbroker owe you a fiduciary duty?  And if a fiduciary duty is owed, what does that mean?  Assuming a fiduciary duty is owed, this generally means that the stockbroker is charged with the obligation to deal with utmost honesty and good faith in his transactions on behalf of his or her client.  The duty is breached where there is a showing of fraud, deceit or absence of good faith.  When the stockbroker places his or her interests before the client’s interests, it is fair to presume an absence of good faith.

Returning to the first question, whether a stockbroker owes a fiduciary duty to a client depends upon many factors.  Those factors include whether federal or state law applies.  Each state’s laws are different, and federal law varies throughout the country.  Determining the existence of a fiduciary duty may include a consideration of the parties’ reasonable expectations regarding the relationship.  Not all relationships are considered equal.  In any relationship, each party has expectations, and whether those expectations are reasonable, or realistic, depends upon the parties’ communications, both express and implicit.

The relationship between a stockbroker and a client is generally a relationship of trust.  After all, what stockbroker would say that he or she does not want to be trusted?  They all want to be trusted.  They do not want to be regarded as used car salesmen.  Stockbrokers invest much time and energy into convincing clients that they are trustworthy.  This investment is made through advertising, written communications, and oral communications.  One major brokerage firm states on its website,

What to Expect

Investing to reach long-term goals takes discipline, patience and confidence in your financial advisor and his or her firm.

What do they mean by “confidence”?  Is that the same as “trust”?  Another firm states that its approach to, “providing ongoing advice and asset management is to integrate a comprehensive financial plan, a wide array of investment solutions, and ongoing advice from your Financial Advisor into a roadmap for your family’s future.”  Does ongoing advice mean that they will tell you when to sell an investment?  Are they suggesting that when they say nothing, an investor may construe silence as a recommendation to hold?

When an investor chooses to trust a stockbroker to conduct due diligence before presenting an investment, that choice is based upon trust.  There is a trust that the stockbroker will read the fine print, understand the nuances of the investment, understand whether the investment is appropriate for the investor, and to accurately disclose the benefits and risks of the investment.  There may also be a trust that after the investment is purchased, that the stockbroker will have a continuing obligation to advise whether it makes sense to hold or sell the investment.  If there occurs a negative material event about the investment, it is reasonable to expect the stockbroker to disclose this fact.  I have yet to meet a stockbroker who will say that his client should view the relationship as “one and done”, like buying a used car.  Yet not surprisingly, when something goes wrong with the investment and that fact is not disclosed to the investor, the stockbroker’s lawyer will later argue that there was no duty to keep the investor informed.  Incredibly, there actually exists support in the law for this position.  It therefore makes sense, at the beginning of the investor / advisor relationship, to clearly articulate the extent of the stockbroker’s duties.