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Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

What Constitutes a Breach of Fiduciary Duty?

New investors often hire financial advisors to manage their investment portfolios. Financial advisors can give investors valuable insight into successful investment strategies and how to maximize their returns. A financial advisor who understands your investment needs can offer a variety of benefits, as long as they uphold their fiduciary duty. Unfortunately, not all financial advisors keep their clients’ interests ahead of their own. 

Before hiring investment professionals, you should know what obligations and duties they owe you. This will help you recognize advisor misconduct or negligence more easily when and if the misconduct occurs.

If you or a loved one suffered losses after your financial advisor breached a fiduciary duty, contact our securities fraud attorneys at Kurta Law today by phone at 877-600-0098 or by email at

What Is a Fiduciary Relationship?

A fiduciary relationship only arises in specific circumstances. For instance, when someone, perhaps an investor, places their trust in their financial advisor to use their expertise on their behalf. Other examples include attorneys acting for their clients, and trustees acting on behalf of the estate beneficiaries. The fiduciary duty definition depends on the type of fiduciary. 

However, the law does not consider all investment professionals fiduciaries. Registered Investment Advisers (RIAs) are fiduciaries, while stockbrokers are not. That said, a stockbroker does still owe you certain obligations, and must comply with FINRA’s suitability rules. RIAs register with the SEC and are the only investment professionals allowed to refer to themselves as “financial advisors.” (Read more about the difference between investment advisers and stockbrokers here.)

A fiduciary’s primary duties include:

  • Putting the client’s interests first, ahead of their own interests;
  • Avoiding conflicts of interests or disclosing such conflicts to the client as soon as they arise; and
  • Acting with honesty, good faith, and loyalty toward the client.

Fiduciary duties impose a legal responsibility on the financial advisor, and a breach of those duties gives the investor grounds to hold the advisor liable.

Is My Investment Advisor a Fiduciary?

According to the Investment Advisers Act of 1940, only registered investment advisors are considered fiduciaries. Regulation Best Interest clarified that only RIAs can refer to themselves as financial advisors, although stockbrokers have been known to use this term as well. If you want to know whether your financial advisor is a registered investment advisor, you can ask them. You should also check the SEC Investment Advisor Database for a list of federally registered investment advisor firms. An investment adviser fiduciary relationship is created when you sign an agreement to work with an individual investment advisor or an investment advisory firm.

Broker-dealers and stockbrokers do not fall into this category. Previously, broker-dealers could comply with the lower “suitability standard.” However, in 2020, the SEC enacted Regulation BI, also known as the Best Interest Rule. While there’s no way to create a formal stockbroker fiduciary relationship, the SEC’s Best Interest Rule requires broker-dealers to act in the best interests of their clients when making investment recommendations. Specifically, Regulation BI imposes four primary obligations on broker-dealers:

  1. Disclose material facts about their broker’s relationship with the client, including specific disclosures about the capacity in which the broker is acting, fees, and the type and scope of services provided.
  2. Exercise reasonable diligence, care, and skill when making investment recommendations. After assessing the potential risks, rewards, and costs associated with each recommendation in light of the customer’s investment profile, a stockbroker can only recommend the investment if it is in the customer’s best interest.
  3. Establish, maintain, and enforce written policies and procedures reasonably designed to identify and, at a minimum, disclose or eliminate conflicts of interest.
  4. Establish, maintain, and enforce written policies and procedures to achieve compliance with Regulation BI.

If your financial advisor or broker fails to make investment recommendations in your best interest, seek advice from a securities attorney right away. Securities attorneys can advise how best to pursue a claim against your financial advisor or stockbroker.

What Constitutes a Breach of Fiduciary Duty?

A breach of fiduciary duty occurs any time a fiduciary puts someone else’s interest above the interests of their client. This can happen in a wide variety of ways. Common examples of investment advisors breaching their fiduciary duties are detailed below.

Failure to Conduct Due Diligence

Investment advisors cannot properly recommend an investment they don’t know anything about. Before recommending an investment, a financial advisor must conduct thorough research on the investment to understand its potential risks and rewards. The information a financial advisor should uncover through their due diligence includes:

  • The cost associated with the investment;
  • An investment product or strategy’s investment objectives;
  • Any special characteristics of the investment;
  • Liquidity concerns;
  • Potential benefits and risks; and
  • Likely performance in a variety of market conditions.

Recommending a particular investment or investment strategy without conducting due diligence constitutes a breach of fiduciary duty. 

Recommending Unsuitable Investments

No two investors are the same. For this reason, fiduciary duties impose an obligation on financial advisors to consider the individual investment profile of each client before making recommendations. In other words, brokers can only recommend investments suitable for each specific client. An investment profile includes information such as:

  • Age;
  • Employment status;
  • Investment time horizon;
  • Risk tolerance;
  • Liquidity needs; and
  • Investment goals.

Utilizing the same investment plan for every client can result in unsuitability allegations against an investment advisor. If your financial advisor recommended unsuitable investments for you, you should consult with a securities attorney.

Engaging in or Failing to Disclose a Conflict of Interest

When advising a client, an investment advisor can encounter conflicts of interest either between their own interests and the interests of a client or between two separate clients. When this occurs, your financial advisor should disclose the full extent of the conflict of interest immediately. You can opt to waive the conflict of interest and proceed with the investment transaction by providing informed consent.

Excessive Trading

Excessive trading, also known as churning, occurs when an investment advisor buys and sells securities excessively in your account with the primary goal of generating commission fees. FINRA published an investor article identifying ways to recognize excessive trading, including:

  • Reviewing your account statements regularly;
  • Keeping track of the fees you’re incurring on trades; and
  • Asking for an explanation if you notice a high volume of activity in your account.

If a financial advisor made excessive trades in your account, you could recover your losses through FINRA arbitration.

Unauthorized Trading

The SEC defines unauthorized transactions as trades a broker makes for a customer without the customer’s permission or authorization. How an investment advisor obtains this permission varies depending on the type of investment account. 

Investors with a non-discretionary account hold more control over their account. Non-discretionary accounts require your financial advisor to get your verbal or written authorization prior to making each individual transaction in your account. If you have a non-discretionary account and realize your financial advisor is making discretionary trades, you should report the misconduct to their broker-dealer immediately. If you fail to report the misconduct, the broker-dealer will likely claim you ratified the unauthorized trade by not voicing your objection right away. The primary disadvantage of non-discretionary accounts involves your advisor’s inability to make trades without your approval, meaning some investment opportunities could dissipate. 

On the other hand, a discretionary account allows your broker to manage your investment account at their discretion. Advisors managing discretionary accounts can make trades without securing authorization—within the limits of their other obligations. This eliminates the risk of missing out on a big investment opportunity. However, giving your advisor the authority to make discretionary trades in your account can open you up to potential misconduct.

Misrepresentation or Omission of Material Facts

To make an informed decision, investors need all the material information about an investment. Material information is information a reasonable investor would consider necessary when deciding whether to invest. Sometimes, financial advisors will misrepresent the potential risks of an investment to convince their clients to invest. Alternatively, your advisor could simply omit material information about the investment when describing it to you. However, the failure to disclose or the omission of this information constitutes a breach of fiduciary duty.

Lack of Diversification

Investors know not to put all their eggs in one basket. If your investment portfolio is heavily concentrated in one particular market, you’ll suffer significant losses if that market crashes. Instead, financial advisors should recommend a mixture of investments allocated among various asset classes and industries. If your entire investment portfolio hinges on the success of one kind of investment, that could indicate a lack of portfolio diversity. If your financial advisor failed to adequately diversify your portfolio, you could have grounds to recover your investment losses in FINRA arbitration.

Any of this misconduct can demonstrate your financial advisor failed to act in your best interests, thereby violating their fiduciary obligation.

Think Your Financial Advisor Breached a Fiduciary Duty? Contact Kurta Law Today

If you suffered investment losses as a result of your financial advisor breaching a fiduciary duty, you could recover your losses in FINRA arbitration. Understanding what constitutes a breach of fiduciary duty comes with many years of handling these kinds of cases. Contact a New York investment fraud lawyer today so can you recover the compensation you deserve. Call (877) 600-0098 or email 


Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.