Let’s discuss fiduciary relationships between a financial adviser and their clients. It has been said that your financial adviser is the guardian angel of your finances. Do you believe this?
A financial adviser is a professional who can help you with your financial planning and investment strategy. They have the legal and ethical obligation to help you develop a plan to reach your financial goals, such as:
- saving for retirement,
- buying a home,
- funding your child’s education, or
- choose and manage your investments.
Fiduciary Relationships: Financial Advisers and Their Clients
How does a fiduciary relationship occur? A fiduciary relationship can develop by agreement or because of a specific role or relationship that presumes a fiduciary duty. In New South Wales, financial advisers have a fiduciary duty to their clients.
The Corporations Act 2001 and the Australian Securities and Investments Commission (ASIC) Act 2001 enshrine the fiduciary duty between a financial advisor and their client. ASIC also has several regulations in place that govern the conduct of financial advisers, including the Financial Services Reform Act 2001.
If a financial adviser breaches their fiduciary duty to their client, the client may be able to sue the advisor for damages. The civil or supreme court may also order the advisor to disgorge any profits they made due to their fiduciary duty breach.
Fiduciary Obligations of a Financial Adviser
Financial advisers who are fiduciaries have a legal responsibility to act in the best interest of their clients, offering the lowest cost financial solutions to fit their clients’ needs. The fiduciary obligation of a financial adviser involve the following:
- Putting their principal’s interests rather for their own profit or personal gain, seeking the best prices and terms.
- Acting in good faith and providing all relevant facts to clients.
- Providing suitable advice means they must have a reasonable understanding and make a reasonable inquiry into the client’s financial objectives.
- Prioritising the interests of their clients before their own, avoiding potential conflicts of interest that may impact their ability to make good decisions.
- Providing disclosures to clients that are full and fair and not misleading to clients.
- Only recommending investments and other financial planning products that benefit their clients.
Breaches of Fiduciary Relationships
What will happen if a financial adviser breaches his or her fiduciary duty to the client? Breach of fiduciary duty may entitle the client to equitable remedies and lays the foundation for a breach of the conditions of any licence required to operate a financial services business.
In some circumstances, fiduciaries may be able to defend the breach in court. For example, they can argue their actions were permissible on the basis that full disclosure to and informed consent from the principal was made beforehand.
What Constitutes Breach of Fiduciary Duty?
A breach of fiduciary duty occurs when an individual, such as a financial advisor, fails to act solely in good faith and is negligent or malicious in their duties. Here are some of the actions that may constitute a breach of fiduciary duty by a financial advisor:
- Failing to act in their client or beneficiary’s interests.
- Failing to disclose conflicts of interest.
- Providing unsuitable advice.
- Failing to provide full and fair disclosures to clients.
- Engaging in securities fraud.
- Failing to conduct due diligence.
- Making unauthorised trades.
- Charging excessive fees.
Not all financial advisors are fiduciaries, and those who are not bound by fiduciary duty may have conflicts of interest that could impact their advice. However, for any recommendations made after June 30, 2020, financial advisors have a fiduciary duty to avoid any conflicts of interest.
Equitable Remedies Available to the Client
In New South Wales, Australia, a client whose financial adviser breached their fiduciary relationship may be entitled to equitable remedies. Equitable remedies are remedies that are granted by a court of equity, which is a court that has the power to grant remedies that are not available in a court of law.
Here are some of the equitable remedies that a client may be entitled to:
- Rescission – This remedy allows the client to cancel the transaction that was entered into as a result of the adviser’s breach of fiduciary duty.
- Damages – The client can recover, by way of damages, the financial losses that they suffered as a result of the adviser’s breach of fiduciary duty.
- Account of profits – This allows the client to recover any profits that the adviser made as a result of such breach.
- Injunctions – This remedy prevents the adviser from continuing to act in a way that allows him or her to commit such a breach.
The specific equitable remedies that a client may be entitled to will depend on the circumstances of their case. Additionally, the courts will consider many factors when determining if an equitable remedy should be granted to a person, including:
- a lengthy delay in seeking a remedy and
- the conduct of the parties.
Importance of Fiduciary Relationships
Fiduciary relationships are essential in building trust and confidence between a financial adviser and client because:
- Fiduciary financial advisers are legally obligated to act in their client’s best interests. This means that clients can trust that their adviser is working for them and not for their own financial gain.
- They must provide complete and fair disclosures to clients. Clients can trust that their adviser is transparent about their fees, conflicts of interest, and other important information.
- They must provide useful advice in recommending investments and other financial planning products that are the best fit for their needs.
- They must avoid conflicts of interest which means that clients can trust that their adviser is not making recommendations that benefit the adviser more than the client.
- They must prioritise the interests of their clients before their own.
How Can We Help With Fiduciary Duties and Relationship Matters?
If you think your financial advisor has breached their fiduciary relationships, seek legal advice from one of our experienced lawyers at JB Solicitors. We can help you understand the remedies that may be available to you. Some of our services include:
- Provide complete legal advice about the fiduciary rule.
- Investigate the breach of fiduciary relationship or duty and gather evidence to support the case.
- File a lawsuit on behalf of the client against the financial adviser who owe fiduciary duties.
- Negotiate a settlement with the adviser or the insurance company to compensate the client for losses.
- Represent the client in court.
- Help identify whether ad hoc fiduciary relationships or a fiduciary relationship exists
- Help the client recover damages, including financial losses, attorney’s fees, and other costs associated with the breach of fiduciary duty.
Contact us through this link for enquiries.
