Financial planning lawsuits are civil lawsuits that occur when one party, often a professional financial advisor, causes losses due to their faulty financial advising. In a business context, financial planning lawsuits occur when a business organization hires an outside group of financial professionals to do financial consulting with them.

Such contractual and fiduciary arrangements are typically made according to a services contract. The services contract spells out the risks and liabilities for each party.

Sometimes, a financial advisor is hired specifically to help a business draft a workable financial business plan. In many cases, a principal-agent relationship is created upon the hiring of the financial advisor. This means a fiduciary relationship exists between the financial advisor and their business client.

With a fiduciary relationship, the financial advisor or planner owes a duty of care to the business client to ensure that the financial plans are in the best interests of the business client. As such, when such duties of care are violated, financial planning lawsuits can arise.

What Are Some Common Reasons for Filing a Financial Planning Lawsuit?

As mentioned above, financial planning professionals owe a duty of care to their clients. Financial planning legal disputes often arise if the financial advisor:

  • Uses company funds or company insider information for their own profit;
  • Fails to invest company resources according to “prudent business judgment” or invests in companies where they profit from the investment.
    • It is important to note that such investments are typically referred to as self-dealing;
  • Discloses company trade secrets or other protected intellectual property to a competing business;
  • Commingles the business’ money with their own personal financial accounts; or
  • Breaches their fiduciary duty of loyalty to their client in any other way.

Although financial advisors cannot know every detail about future events, market conditions, or trends, they are still expected to exercise a reasonable amount of foresight when helping create and implement business plans for their clients.

Many financial advisors may also work in-house for the company they are financially advising. Such in-house financial counselors must comply with the same professional and ethical standards for financial advising as outside advisors.

What Is Considered a Breach of Fiduciary Duty?

In short, the legal term fiduciary refers to a person with either a legal or ethical relationship of trust with someone else. When a person has a fiduciary duty to another person, the fiduciary must conduct themselves according to the benefit of that other person, who is often their client.

The person to whom the duty is owed is sometimes referred to as the principal or the beneficiary. A fiduciary generally takes care of money or other financial assets to benefit the beneficiary.

One of the most important fiduciary duties is the obligation to act for the beneficiary’s benefit, not for the fiduciary’s benefit. Fiduciary duties are categorized in three ways:

  1. Duty of Care: A fiduciary is expected to use the amount of care that any ordinarily prudent person would exercise in a similar position as theirs.
    • For example, a fiduciary has a duty to treat the property or money that they are trusted to manage and protect as their own. This means that the fiduciary must make prudent decisions regarding the best ways to manage and protect the assets they are entrusted with;
  2. Duty of Good Faith: The fiduciary is also tasked with the duty of acting with conscious regard for their responsibilities as a fiduciary. This means that the fiduciary must not act in any fraudulent or deceitful way, to the detriment of the beneficiary; and
  3. Duty of Loyalty: A fiduciary’s duty of loyalty is vast, and the breach of the duty of loyalty is often the most cited breach in civil lawsuits. In short, the fiduciary must act for the benefit and advantage of the beneficiary without making any decisions that would be disadvantageous for the beneficiary.
    • Importantly, a fiduciary may not make any decisions on behalf of the beneficiary out of self-interest or for their own benefit, such as self-dealing.

What Is the Fiduciary Duty of Loyalty?

As previously mentioned, one of the most important fiduciary duties is the fiduciary duty of loyalty. Fiduciaries are expected to act in good faith, and with all of the fairness, morality, and honesty that the law requires of someone in their position. This means that fiduciaries must not be involved in any self-dealing transactions, conflicts of interest, or any other abuses of the beneficiary for their own personal advantage.

As such, when making any transactions or financial decisions on behalf of the principal, the fiduciary must avoid the following:

  • Misappropriating Business Opportunities: Fiduciaries must not seize the business opportunity for their own benefit. The fiduciary has an obligation to disclose and offer any advantageous business opportunity to the beneficiary when that opportunity clearly belongs to the beneficiary;
  • Making Interested Transactions: Fiduciaries are entrusted with a beneficiary’s property and money and, as such, have a duty to protect and manage that property on behalf of the beneficiary.
    • This means that fiduciaries must not make interested transactions using the property entrusted to them. For example, a fiduciary may not buy or sell assets, make any type of personal profit, or make any self-dealing transactions using the money or property entrusted to them; and
  • Breaking Their Duty of Confidentiality: A duty of loyalty also requires that the fiduciary maintain confidentiality regarding all financial decisions and private information with which they have been entrusted.
    • A beneficiary may not wish for public disclosure of their private matters. As such, the fiduciary would be prohibited from disclosing information about the beneficiary’s property or transactions, or they will face a civil lawsuit for improper disclosure.

What Can Be Done About a Breach of Fiduciary Duty?

Breaches of the duty of loyalty may occur in several different ways. However, breaches generally occur when the fiduciary acts in any way that benefits themselves as opposed to the beneficiary or acts in such a way that is to the detriment of the beneficiary.

A breach could also include the fiduciary acting to benefit others at the expense of their beneficiary. Fraudulent conduct also constitutes a breach of the duty of loyalty, and the fiduciary may be prosecuted for the violation and the underlying offense of fraud.

In order to recover damages for a breach of fiduciary duty, the beneficiary (i.e., the claimant) must show:

  • That the fiduciary occupied a position of trust or was placed in a fiduciary relationship;
  • That the fiduciary acted in a manner that benefited them personally while in the scope of their fiduciary relationship with the beneficiary;
  • Proof that the duty of loyalty was owed to the beneficiary, such as a contract;
  • That the duty owed was breached by the fiduciary;
  • That the breach caused damages to the claimant; and
  • That the damages caused are quantifiable.

If the claimant brings a civil claim against the fiduciary, the claimant may receive damages for any lost profit due to the breach. The claimant may also receive restitution to recover profits that the fiduciary gained to the beneficiary’s detriment. Further, it may be possible for the claimant to recover profits gained by the fiduciary even if the claimant themselves did not actually suffer any harm.

In addition to the above remedies, the financial advisor or fiduciary may lose their operating license or face other professional penalties. Lastly, if the breach or violation is due to a company-wide policy, the court may require the financial company to readjust its company practices so that they conform to state and federal business law guidelines.

Do I Need a Lawyer for Help with a Financial Planning Lawsuit?

If you are in a fiduciary relationship, and the fiduciary has breached their duty to you, you should consult with an experienced financial attorney.

An experienced attorney can help you understand your legal rights and options. Finally, an estate attorney can file any necessary legal paperwork to protect your rights and represent you in court as needed.