What is fiduciary duty? Fiduciary duty is the legal obligation for financial advisors to act in the best interest of clients. In 1940, the United State Supreme Court ruled that financial advisors registered under the Investments Advisors Act of 1940 are fiduciaries and must act for the benefit of the person to whom he owes fiduciary duties to the exclusion of any contrary interest.
However many financial services firms deliberately do not register their financial advisors under the Investment Advisors Act in order to avoid fiduciary duty. They do not want to be legally obligated to act in the best interst of clients. Many financial services companies intentionally avoid registering their financial advisors under the “Act” for one simple reason—to avoid fiduciary duty. A financial advisor registered under the Act is obligated to act in the best interest of the client and would be obligated to recommend a lower cost solution unless it was also of significantly lower quality. Interestingly, the financial advisor would be prohibited by law to accept a commission.
A financial advisor registered under the Act is legally called an Investment Advisor Representative (IAR) and must work for a company legally called a Registered Investment Advisor (RIA). Neither an IAR nor an RIA is permitted from being compensated by commission. Rather, both can be only compensated by fees.
A fiduciary duty lawsuit is filed when a client feels a financial advisor recommended inferior advice or deliberately misled them to act against the client's own interest.
For many accounting professionals, the solution is to refer their clients to other financial professionals who can provide advice and counsel in specific areas. One of the most important issues to consider when making these types of referrals is whether those advisors have a fiduciary duty to their clients, just as you do. An advisor who is a fiduciary occupies a position of special trust and confidence. As a fiduciary, the advisor is required to act with undivided loyalty to the client, and to put the client’s best interest first at all times.
It may surprise you to know that more than 90 percent of the professionals who call themselves financial planners or financial advisors are not fiduciaries. Rather than being required to work in the best interests of their clients, they may be required to work only in the best interests of their employers, if only out of a desire to remain employed. Individual clients become expendable; in fact, they may not even be seen as personal clients at all. But advisors who are registered investment advisors, covered by state or federal law, have the legal obligation to keep their clients’ interests paramount at all times. They are regulated either by the Securities and Exchange Commission (SEC) or state securities regulators.
National Offices (516) 938-5007 or (516) 935-7346
LIFE INSURANCE LITIGATION