Misconduct by Financial Planners

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 What Is Financial Planner Misconduct?

When a client places a stockbroker or other type of financial planner in charge of their investments, they are putting that individual in a position of great trust. A financial planner is often trusted with the client’s financial security.

Unfortunately, this powerful position may tempt some individuals to abuse their power or act carelessly. This can lead to cases of financial advisor malpractice.

How Can Financial Planners Abuse Their Power?

There are numerous ways in which financial planners may abuse their positions of trust. Brokers have a legal obligation to act in the best interests of their clients.

A broker may breach this duty by recommending financial investments that are not consistent with their client’s investment goals or financial interests. The broker must be a direct cause of the injury to the client in order for the client to recover damages.

There are some financial planners who also trade to earn commissions. They are, however, obligated to recommend stock on its own merit, not based upon any additional financial rewards that they might receive.

One of the most common types of financial planner misconduct is referred to as churning. Churning occurs when a broker entices a client to make frequent trades so they can increase their commissions.

There are also other types of misconduct, but all types share a common goal, to serve to provide more money to the broker to the detriment of their client.

What Are Financial Planning Lawsuits?

Financial planning lawsuits are those lawsuits that arise when one party, typically a professional financial advisor, causes a client a loss because of their faulty financial advising. In the context of a business, financial planning lawsuits arise when a business organization hires an outside group of financial professionals to handle financial consulting with them.

These contractual and fiduciary agreements are often made using a services contract. Service contracts outline the risks and liabilities for each party.

In some situations, financial advisors are hired specifically to help a business draft a workable financial business plan. In many situations, a principal-agent relationship is created when the financial advisor is hired.

This means that a fiduciary relationship exists between the financial advisor and their client. In a fiduciary relationship, a financial planner or advisor owes a duty of care to the business client to ensure that the financial plans that are made are in the best interests of the client.

If these duties of care are violated, a financial planning lawsuit may arise.

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

As previously noted, a financial planning professional owes a duty of care to their client. A financial planning legal dispute may arise if a financial advisor engages in any of the following:

  • Using company funds or company insider information for their own profit;
  • Failing to invest company resources according to prudent business judgment or investing in companies where they profit from the investment;
    • It is important to note that these types of investments are typically referred to as self-dealing;
  • Disclosing company trade secrets or other protected intellectual property to a competing business;
  • Commingling the business’ money with their own personal financial accounts; or
  • Breaching their fiduciary duty of loyalty to their client in any other way.

Although a financial advisor is not able to know every detail about a future event, market conditions, or trends, they are expected to exercise reasonable foresight when helping to create and implement a business plan for their client. There are many financial advisors that also work in-house for a company that they are financially advising.

An in-house financial advisor is required to comply with the same professional and ethical standards for financial advising as an outside advisor.

Are There Any Legal Defenses a Financial Planner May Have Against a Malpractice Suit?

Yes, there are some possible legal defenses a financial planner may have against a malpractice or financial planning lawsuit. A financial planner or stock broker cannot be held responsible for a client’s loss if the advisor did not do anything wrong compared to any other advisor.

In other words, if the advisor were replaced with any other advisor and the result would be the same, the advisor would not be held liable. The loss of money on an investment is not, in itself, evidence of misconduct.

Every investment carries with it some inherent risk. If a broker or advisor is not the cause of the harm, that advisor cannot be held liable for the lost investment.

In addition, a financial advisor may have included contractual provisions in the agreement with their client to limit their liability in case financial injury occurs. One of these provisions may include assumption of the risk.

This means that the client was aware of the turbulent nature of the market but still desired to proceed with the investment anyway.

What Is Considered a Breach of Fiduciary Duty?

The legal term fiduciary refers to an individual who has either a legal or ethical relationship of trust with another individual. When an individual has a fiduciary duty to another individual, that fiduciary is required to conduct themselves according to the benefit of the other individual, who is often their client.

The individual to whom a duty is owed may be referred to as the principal or the beneficiary. In general, a fiduciary takes care of money or other financial assets for the benefit of the beneficiary.

One of the most important fiduciary duties is the duty to act for the benefit of the beneficiary and not for the benefit of the fiduciary. Fiduciary duties fall into three categories, including:

  • Duty of care: Fiduciaries are expected to use the amount of care that any ordinarily prudent individual 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 if it was their own. This means that the fiduciary must make prudent decisions regarding the best ways to protect and manage the assets they are entrusted with;
  • Duty of good faith: The fiduciary must also act with conscious regard for their responsibilities as a fiduciary. This means that the fiduciary must not act in any deceitful or fraudulent way that results in detriment to the beneficiary; and
  • Duty of loyalty: A fiduciary’s duty of loyalty is broad. The breach of this duty is often the most cited breach in civil lawsuits. The fiduciary is required to act for the benefit and advantage of the beneficiary without making any decisions that would be disadvantageous for the beneficiary;
    • Fiduciaries may not make any decisions on behalf of the beneficiary out of their own self-interest or for their own benefit, for example, self-dealing.

What Should I Do If I Suspect Financial Planner Misconduct?

If you believe that you have been a victim of financial planner misconduct, you may be entitled to get some of your money back. You should first contact your financial planner in writing and explain your concerns.

It is important to keep copies of all correspondence with your planner. If you are unable to resolve your issue in this manner, you should consult with a liability lawyer as soon as possible.

Your lawyer can review your case, determine if misconduct occurred, and assist you with filing a lawsuit.

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