Understanding Investment Advisors’ Fiduciary Duty to Individual Investors

As an individual investor, you are entitled to a number of important protections under federal law. One of these protections exists in the form of the “fiduciary duty” that investment advisors owe to their clients.

Fundamentally, the fiduciary duty requires investment advisors to act in their clients’ best interests when providing advice and making trades on their clients’ account. As summarized by the former Director of the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations, the fiduciary duty establishes five primary obligations for investment advisors:

• To always put investors’ interests first;
• To act with the “utmost good faith;”
• To provide complete disclosure of facts that are material to investment decisions;
• To refrain from providing investors with misleading information (either intentionally or unintentionally); and,
• To disclose all conflicts of interest.

Where Does Investment Advisors’ Fiduciary Duty Come From?

While it is well-established that investment advisors’ fiduciary duty exists under Section 206(3) of the Investment Advisor Act of 1940, this law does not actually use the word, “fiduciary.” Instead, the fiduciary standard that applies to investment advisors exists as a result of a U.S. Supreme Court decision from 1963. In the case of SEC v. Capital Gains Research Bureau, the Court stated:

“The Investment Advisers Act of 1940 . . . reflects a congressional recognition ‘of the delicate fiduciary nature of an investment advisory relationship,’ as well as a congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline [an] investment adviser . . . to render advice which was not disinterested.”

Since the U.S. Supreme Court’s decision in SEC v. Capital Gains Research Bureau, federal courts around the country have consistently held investment advisors to this fiduciary standard. When investment advisors breach their fiduciary duty, clients who suffer financial harm are entitled to recover their investment losses.

Investment Advisor vs. Investment Broker

Importantly, while investment advisors owe a fiduciary duty to their clients, investment brokers generally do not. While there has been much debate over whether the SEC should subject brokers to a fiduciary standard in recent years, to date no pertinent laws or regulations have been adopted. As a result, as an individual investor, it is important to know whether you are working with a broker or an advisor. If you are working with an investment broker, you are essentially working with a salesperson who works on commission. If you are working with an investment advisor, then you can expect to receive investment recommendations that have been conceived with your best interests in mind.

If you are not sure whether you are working with an investment broker or an investment advisor, you can review our Checklist and Questions to Ask When Choosing an Investment Broker or Advisor, and you can click here to learn about other ways to recover fraudulent investment losses.

Speak with an Investment Fraud Attorney at Zamansky, LLC

At Zamansky, LLC, we are a team of experienced attorneys who exclusively represent individual investors in securities litigation and FINRA arbitration. If you have suffered unexpected and unexplained losses and would like to speak with an attorney, we encourage you to call (212) 742-1414 or contact us online for a free consultation.