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Breach of Fiduciary Duty

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 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 Advisors Act of 1940. This Act places a fiduciary duty on investment advisors. Prior to that decision, the SEC had granted an exemption from this act for stock brokers and their firms.

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.

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