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When is your Stockbroker also your Fiduciary?

Stockbrokers in the market do not all owe a fiduciary duty to their clients. A fiduciary duty, as listed in the Investment Advisors Act of 1940 calls upon investment advisors to act with the highest standard of care. It’s difficult for investors to tell when their stock broker owes them a fiduciary duty and even what having a duty owed to them would translate to. Investing with a financial professional who can be trusted to offer sage investment advice while also placing clients interests above their own is what any investor would want. But generally, what most investors discover if they ever consider filing a lawsuit or securities arbitration claim against their stockbroker for a stock market fraud claim of any kind, is that many investment professionals do not technically owe a fiduciary duty to their clients. What the stock brokers title is, which would seem like a small consideration when deciding who to invest with and use for professional wealth management is of critical importance.

Different Stockbroker Titles

When investors start looking to place money into the markets they are generally confronted with a barrage of titles stock brokers carry. Broker, Stockbroker, Investment Advisor, registered representative, account executive, financial advisor, portfolio management specialist, and on and on. What is important to understand and what few investors know before plunging into the world of professional wealth management, is that whether a broker truly owes a fiduciary duty of placing a clients interests before their own depends on a number of factors. Stock brokers making recommendations for a certain stock or bond alone, is not generally enough for a stock broker to be considered a customers fiduciary.

Before examining what makes your stock broker also your fiduciary its critical to explain why this distinction is so important.

Disclosing High Commissions in Securities Products

Stockbrokers without a fiduciary duty have no duty to place their client’s interest above their own. This may seem obvious concerning issues such as fraud or churning a clients account to generate more commissions. The more subtle area is when a broker who may not be churning a clients account, may still be receiving a very high commission on an investment product and marketing that product to investors in order to collect the commission before considering whether it is suitable. Stock brokers with a fiduciary duty must consider their clients best interests and disclose material information such as a very high commission being received to them.  

Duty to Warn

If material information that is adverse to a stock or bond breaks in the market – does a stockbroker have an obligation to inform the client of this event? This will depend largely on whether the stockbroker is a fiduciary.

Stock Brokers in Non-Discretionary Account

Simply put Stockbrokers are also known as registered representatives and can be a fiduciary depending on the relationship they have with their clients. If the stockbroker works on a nondiscretionary basis in a fee-based account whereby the broker receives a commission on trades, a court or arbitration panel will be less inclined to view the financial advisor as a fiduciary. As stated in one federal court decision a brokers ordinarily end after each transaction is done, and thus do not include a duty to offer unsolicited information, advice, or warnings concerning the customer’s investments. The decision goes on to state that on a transaction by transaction basis a stock broker has a duty to give honest and complete information concerning the trade but not that the obligation client ceases when the trade is executed.

Registered Investment Advisors

 An RIA with discretion who is trading in a managed account or wrap account and receiving generally a percentage of the client’s assets as a fee is a fiduciary. Here the RIA has a duty of care and must not only warn clients of material adverse account. While this seems like the best option there are still risks. For one be very wary of independent registered investment advisors operating under their own auspices. As will be discussed in another post, these wealth management specialists have their own set of risks and pitfalls. As was discussed in our post on churning, it may be prudent for investors without a great deal of trading activity who have a set managed account to use a commission based broker. Here paying for wealth management advice only when entering trades may be prudent.

A stockbroker working for commissions who is on a managed investment account may still have a fiduciary duty. As with almost stockbroker fraud related the inquiry is fact sensitive and will depend on the investors investment profile, trading history, new account profile another information. Again Keep in mind even if a fiduciary duty is owed stock market losses on their own will obviously not be enough to bring a claim. 


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