Breach of Fiduciary Duty Leading to Investment Loss
A "fiduciary" is defined in law as one who has the legal duty to act in the best interest of another. A "fiduciary duty" is an affirmative duty of good faith that compels the fiduciary to place the client's interest before his or her own interest. Laws in different jurisdictions determine who is considered a fiduciary and the duties of fiduciaries.
When a broker agrees to execute an order, the broker and firm have a fiduciary duty of "best execution" - to not place the firm's interest before the clients and to execute the order at the best price available in the marketplace.
When brokers agree to manage clients' assets and/or obtain permission to place orders on their behalf, the brokers have additional fiduciary duties to these clients. Financial Advisors have an even greater fiduciary duty to their clients, and brokers and their firms are often considered fiduciaries to their clients when performing the same function.
Recently, a Federal appeals court determined that when brokerage firms handle client accounts in fee-based "wrap accounts" they are subject to the Federal Investment Advisers Act of 1940. This Act places a fiduciary duty on investment advisors.
A claim for "breach of fiduciary duty" is considered in the nature of a fraud under laws of most jurisdictions and this claim is afforded certain legal benefits over other claims such as negligence. Of course, an advisor can breach the fiduciary duties owed to his clients by accident. The conduct can simply be negligent or grossly negligent.
A Fiduciary duty, the acquired duty of one party towards another, is an ancient concept. When you boil it down to its essence, a fiduciary duty exists when one party depends on another party to carry out services or specific directions to accomplish something. The duty is created because individual A depends on individual B to carry out a task. In an ancient context, it could be something as simple as an owner of sheep entrusting his flock to a shepherd. As the shepherd was entrusted with chattel, he had a duty to protect the sheep owners' wealth. Fraudulent activity or even negligent acts would be a breach of the shepherd's fiduciary responsibilities.
Thusly the concept of fiduciary duties dates back to the time of Hammurabi's Code from 1790 BC. Even back then there were concepts of agency, as stated in Hammurabi's laws. These legal concepts were created as a result of commerce that occurred in Mesopotamia. The laws tended to focus on situations where a merchant (principal) gave an agent, usually a caravan operator or boatman, money to cover the transportation of goods, or for the purchase of goods to be traded or sold.
Famous thinkers of antiquity opined on the concept of a fiduciary duty. Confucius discussed the maxim in The Analects wherein he concluded that, when acting on behalf of others, you have to always be loyal to their interests. During the golden age of Greece, Plato discussed concepts of fiduciary duties both in the Crito and in his seminal work, the Republic. The concept of a "social contract" is closely tied to a fiduciary duty.
However, it was the Romans who developed the word "fiduciary" in their laws. The word origin is from the Latin fiduciarius meaning entrusted, which in turn is based on the Latin root fiducia defined as a deposit or pledge. Under Roman law, a person acting as a trustee, or analogous to that of a trustee, must act in scrupulous good faith and candor. The oft-quoted Roman writer, Cicero had thoughts on fiduciary obligations between the principal and the agent. His belief was that an agent who is careless in the execution of his duties is very dishonorable and undermines the very basis of a civilized society.
Under English common law and the Courts of Equity of England, the concept of fiduciary duties flourished. These Courts of Equity routinely addressed situations involving a person's abuse of confidences and trust. As time passed, rules and terms related to fiduciary relationships began to evolve. Eventually, these formed the basis of common law fiduciary duties. form as Equity evolved.
In the United States, these same English common laws flourished. The maxim of a fiduciary duty was best coined by Benjamin Cardozo, in Meinhard v. Salmon. The great Supreme Court Jurist concluded that there were many actions permissible in a non-fiduciary setting. However, those same actions were not acceptable in a fiduciary relationship. He believed the trustee was charged with something higher than the standards of the market-place, and that honesty alone was not enough. Cardozo felt that only the highest degree of honor the most sensitive was required and that a tradition had developed that is unbendable and deep-rooted.
As can be seen, Fiduciary duties are time-honored and sacred. Your financial advisor owes such a duty to you when you entrusted him or her with your life savings and or retirement.