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In the handling of money and when one acts as a corporate or individual trustee, there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has voluntarily agreed to act in the capacity of a "caretaker" of another's rights, assets and/or well being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of "good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest." The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary's interests as well the duty not to favor ANYONE ELSE'S INTEREST (INCLUDING THE TRUSTEES OWN INTEREST) over that of the beneficiary. Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals.

The principal is sound but has limited exposure to the fields of financial planning, real estate, securities or life insurance since it is rarely taught in any pre-licensing courses nor as part of continuing education courses as well. Even ethics codes from major organizations have avoided the fiduciary issue since membership did not want to commit to the apparent extra legal exposure.

FIDUCIARY: In real estate, securities and, I submit, in insurance as well, your agent owes you a fiduciary obligation in performing their duties for you. The duties include:

1. Utmost Care- The agent is bound to the higher standard of a professional in the field which extends the standard of duty to investigate within the means of the profession, to ensure the maximum protection and information be provided the principal.

2. Integrity- Defined as the soundness of moral principle and character. It means the agent must act with fidelity and honesty

3. "Honesty and Duty of Full Disclosure" of all material facts, either known, within the knowledge of or reasonably discoverable by the agent which could influence in any way the principal's decisions, actions or willingness to enter into a transaction

4. Loyalty- An obligation to refrain from acquiring any interest adverse to that of a principal without full and complete disclosure of all material facts and obtaining the principal's informed consent. This precludes the agent from personally benefitting from secret profits, competing with the principal or obtaining an advantage from the agency for personal benefit of any kind.

5. Duty of Good Faith- includes total truthfulness, absolute integrity and total fidelity to the principal's interest. The duty of good faith prohibits any advantage over the principal obtained by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.

LEGAL LIABILITY: A financial planner has an obligation to provide a standard of care for/to his clients. In ordinary cases the standard of care is whether or not the accused behaved as an ordinary, reasonable prudent person would have behaved under the circumstances. When acting as a professional however, the required standard of care changes. Such individual is required to use any special knowledge he may have obtained through education, training or experience. Therefore, if a person or entity offers professional services to the general public, it is presumed that the person possesses some degree of special skill or knowledge. A professional negligence case imposes a certain level of skill and knowledge on the accused whether or not he actually possesses that skill or knowledge. This is a standard of minimum professionally acceptable conduct. Though the standards have not been applied until most recently to financial planners, it would appear that the essence- for them as well as brokers at least- is that the adviser put the clients interest first and acts with the best interest of the client in mind. (Note that that is NOT the case with insurance agents. Even the California Department of Insurance states that everyone knows the agent is there to sell life insurance and not necessarily -or certainly legally-to act in your best interests). Trust officers are also held to a higher level of responsibility, but some trust companies attempt to reduce exposure by putting in an exculpatory clause- where they hold themselves only to what a prudent, but inexperienced man would do. But that still does not exclude them from acting recklessly, in bad faith, or willfully breaching their fiduciary duty to the trust beneficiaries. After all said and done, let me ask you, does your planner have the skills and knowledge in the first place? And has he or she put your interest first- or was it the commissions?


The question initially asked is whether or not a broker acts in a fiduciary capacity in dealing with regular retail customers. In view of the fact that the SRO's (Self Regulating Organizations) impose a requirement upon brokers to provide only suitable investments, it would appear that a broker unquestionably has a fiduciary responsibility (at least quasi- fiduciary since most brokers are not acting with full discretionary authority) to their clients whether they want to accept the responsibility or not. The underlying NYSE Rule 405 of "know thy client" along with the NASD's requirement to brokers for suitable investments demands that brokers hold out their customers first in any transaction. This is true even where the investor suggests- or even demands- a product that would be unsuitable for their purposes. (The only time a broker could sell an "unsuitable" product might exist when an investor makes an initial suggestion for an investment and where the broker subsequently informed the investor both verbally and IN WRITING PRIOR to the sale that the investment did NOT fit the suitability standards for the particular investor.)

Security arbitration panels should therefore impute a fiduciary responsibility on the part of brokers in dealing with a customer's money. Investors "trust" brokers based upon a real or perceived level of honesty, good faith, judgment and responsibility in looking after the money entrusted to him/her. The broker, in accepting this money, assumes and accepts a responsibility to serve the best interests of the investor. The broker MUST determine if an investment fits within the customers risk profile, income, age, objectives (assuming correct), etc. and is also within the guidelines for proper diversification.

The Rules of Fair Practice set down by the NASD state that a broker has definitely breached his/her duty if a broker

1. recommends speculative securities without finding the customer's financial situation and being assured that the customer can bear the risk

2. does excessive trading (churning) in a customer's account (whether the account is discretionary or not)

3. does short term trading (and switching) of mutual funds

4. set up fictitious accounts to transact business that would otherwise be prohibited

5. makes unauthorized transactions or use of funds

6. recommends purchases that are inconsistent with the customer's ability to pay.

7. makes unauthorized transactions or use of funds

8. commits fraudulent acts (such as forgery and the omission or misstatement of material facts).

This obligation for fair dealing is not removed through the simple completion of a one page new account form required by brokerage firms. (Minimum information includes full name, address, phone number, employer, social security number, citizenship, acknowledgment that customer is of legal age, spouse's name and employer (if any) and investment objective.

Other information varies as to firm but might include bank and personal references, previous brokerage accounts, and if the account was solicited, referred, walk in, etc.)

Nor is the liability removed by sending the completed form to the client since clients do not and cannot be expected to know how a particular investment fits within individual and specific investment guidelines. It does however relieve the broker of mistakes entered on the form by either party that would be apparent to- and should have been corrected by- the client.

CALIFORNIA REGISTERED INVESTMENT ADVISER- FAIR, EQUITABLE AND ETHICAL: This section 260.238 of the Corporate Securities Law, recently revised as of 6/11/92 by the California Department of Corporations states that it is improper to "recommend to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the clients after reasonable inquiry concerning the client's investment objectives, financial situation and needs and any other information known or acquired by the adviser after reasonable examination or such of the client's records as may be provided to the adviser". Though this degree of emphasis is not provided in any instruction for those getting a securities license, it is the level of conduct that I use in evaluating brokers in formal arbitrations. The section also states that it is a DUTY of the adviser to inform the client "if lower fees for comparable services may be available from other sources."


Most brokers are compensated by commissions. This in itself creates a difficulty since there is an inherent conflict of interest. But since literally all investors recognize the dilemma and the fact that they may use a discount brokers, the problem is mitigated somewhat. That obviously does not excuse a broker for churning an account to earn additional commission.


This problem will reoccur in the industry on a regular basis since investors cannot determine what the amount of compensation was received by the broker by reviewing their confirmation statements. NASD Over the Counter transactions are guided by the NASD 5% rule. It is "roughly" the amount that may be added to purchases or subtracted from sales and reflects the compensation to the broker firm for acting as a principal in the transaction. As differentiated from listed securities where the commissions are clearly identified, only the net proceeds are identified on the confirmation (on agency and other specialized trades, the compensation is shown).

Even if one assumes that a markup or markdown on a trade by THE FIRM fell within acceptable guidelines, it still does not clarify what the BROKER actually received. In some cases, the amount of the broker's total compensation would be nothing greater than what it had been on an agency trade and where a commission had been imposed. However, many brokers also get a part of the overall spread on the sale/purchase as well. The total compensation to the broker can therefore far exceed what would have been made on a commissionable transaction- and yet cannot be discerned by any customer. A pattern of abuse may be evident if the broker has a substantial amount of all income from OTC stock. This pattern is most prevalent on lower priced securities since the markup/down may be greater as a percentage versus higher price stock.

Should a broker show an excessive amount of sales in OTC stock, then a conflict of interest might be indicated since he/she sold particular products primarily for the higher overall compensation.


"Prudent Man" from a recent report I did:

Reference is made to what an ordinarily prudent man would have done given these same circumstances. Unfortunately, the prudent man rule is a generalized dictate that lacks definition- none of the fundamentals are included as reference. Further, all such descriptions fail to address the real life element of the application of investments. This is not to say that generalized precepts do not have value. Many do. "Not putting all your eggs on one basket," is a generally accepted tenet but has limited application without a numerical validation. Part of the issue has to do with the fact that even experts- who are held to higher standards- are seriously suspect in their understanding of diversification. Diversification is defined as how many stock must you have in a portfolio in order to insulate it due to unsystematic risk. Without this, it has been difficult (if not impossible) for (supposed) experts as well inexperienced investors to know what to do given "XYZ" conditions. The fundamentals of investing have never been even taught to brokers nor understood by the Broker Dealer firms. The NASD and SEC have never offered such fundamentals to consumers. Add in the real life emotional and psychological elements that impact investing (and more) and the prudent man rule becomes more confusing. This is not to say that certain basic issues are not viable. Nor does it pardon inexcusable activity. But the rule- without proper definition- has always missed the real world activity of the investor who has been provided nil direction by the entities that are supposed to protect him.

Prudent Investment Practices - A Handbook for Investment Fiduciaries (Foundation for Fiduciary Studies via BenefitsLink (May 2002) This guide from the Foundation for Fiduciary Studies will be of interest to the professional who represents a fiduciary or serves as one. Excerpt: "The primary purpose of this handbook is to outline the simple and straightforward practices that define a prudent investment process for investment fiduciaries. ... The legal and practical scrutiny a fiduciary undergoes is tremendous, and it comes from multiple directions and for various reasons. It is likely that complaints and/or lawsuits alleging fiduciary misconduct will increase. Although some of these allegations may be entirely justified, most can be avoided by following the investment practices outlined in this handbook. Fiduciary liability is not determined by investment performance, but rather on whether prudent investment practices were followed."

Fiduciary Responsibility/Prudent Man/401(k) (CFO Kris Frieswick 2002): Once the debacle of Enron hit, regulators finally took a look at what went wrong- the element of diversification.

Anyway, many are now looking at (or should be looking at) the elements of what was required as a fiduciary.  The article in CFO said that a continued risk lies in the interpretations and execution of the most commonly misunderstood words in ERISA: Fiduciary Duty. "Most of the existing ERISA land mines will main after approval of what reform legislation is enacted says the American Benefit Council.

Part of the problem lies in the interpretation and execution of the most commonly misunderstood words in ERISA: fiduciary duty. "Most of the existing ERISA land mines will remain after approval of [reform legislation]. The demands of being a fiduciary "are based on prudence in a given situation, and it's hard to eliminate risk from this kind of fact-specific determination." Indeed, some observers say that Enron's cardinal sin was not faulty 401(k) plan provisions, but rather its alleged breach of fiduciary duty when its executives encouraged employees to hold on to their Enron stock even as the company was heading into bankruptcy.

Most fiduciary breaches are the result of a lack of prudence. "The fiduciaries just don't understand what their responsibilities are." What's more, managers are frequently unaware that they are, in fact, fiduciaries. This misunderstanding leads to most of the violations that can lead to lawsuits.

ERISA states that a person is a plan fiduciary "to the extent that he exercises discretionary control or authority over plan management or authority or control over management or disposition of plan assets, renders investment advice regarding plan assets for a fee, or has discretionary authority or responsibility in plan administration." As such, a person can be a fiduciary whether or not he has been formally named one in the plan document. There are executives and human-resource managers in companies all over the country, she adds, who may have no idea that they are fiduciaries.

Unfortunately, many companies operate under the misconception that by outsourcing plan administration to third-party vendors and a plan trustee, they have off-loaded fiduciary responsibility. Others think that by giving employees a slate of investment options, and letting employees self-direct those investments, they are also off the hook. "Most companies think, 'We've given them these choices, that's all we have to worry about.' That also shows a lack of prudence,"

ERISA mandates that when no plan administrator is designated in a plan document, the plan sponsor is the plan administrator. In this case, the sponsor cannot insulate itself from ongoing responsibility to another party, such as a third-party administrator, Also, where the sponsor or a committee of plan-sponsor employees appoints the plan trustee or investment manager, responsibility for monitoring the performance of the trustee or investment manager ultimately rests with the sponsor or committee making the appointment.

ERISA roughly as the actions a prudent man in a similar capacity would take in similar circumstances. Execution of fiduciary duty in this instance is not just a matter of picking good investment options or a worthy manager (although the chances of anyone raising fiduciary issues are slim if investments are doing well). The law requires that fiduciaries have a sound process in place to make the decisions.

"Fiduciary responsibility is assessed based on process. To meet the prudent-man standard, fiduciaries must make themselves reasonably knowledgeable about the options available, investigate a variety of options and compare choices with competing offerings, and keep detailed records showing how the final decision was made."

(Fiduciaries don't have a clue. Unless you know what diversification is, by the numbers, you are out to lunch in developing any prudent plan).

The duties don't end there. Fiduciaries are also responsible for monitoring the performance of the trustee, investment managers, or investments they have chosen to ensure that they meet certain performance thresholds or match the investment policies outlined in plan documents. It's the failure to execute on this requirement that causes problems for many companies. "A lot of companies say, 'If there's a problem, we deal with it,'" says Turk-Meena. "That's a blatant ignoring of fiduciary duty. There is a monitoring requirement as well."

Once fiduciaries are identified, they must be educated about exactly what their role entails. The general rule is this: fiduciaries are expected to meet the prudent-man standard in the execution of their duties, which must always be conducted for exclusive benefit of participants and beneficiaries. Obeying this rule can be complicated, but companies can take some basic steps that will reduce the likelihood of stepping on ERISA land mines, say experts.

"It's OK to appoint someone who doesn't have expertise and background in it, but you must make available to that person the resources and people who can help them. If you don't do that, it's an imprudent appointment."

Under ERISA regulations, a fiduciary is relieved of responsibility and liability for any loss resulting from a participant's self-directed investment decision if the employee can choose from a broad range of investment alternatives (at least three meeting certain verification requirements); give investment instructions to buy or sell with a frequency that is appropriate in light of the market volatility of those investment alternatives; and obtain sufficient information to make informed investment decisions.

Nowhere, however, does ERISA require or even encourage employers to educate their employees about making good decisions. Quite to the contrary, ERISA restrictions on "prohibited transactions," or those transactions that ERISA prohibits between a party-in-interest and the plan, have created an environment in which employers are highly unlikely to provide real investment advice or meaningful education to employees. Instead, investment education often involves a lecture on how important it is to diversify your assets into a variety of asset classes, and to minimize risk as retirement approaches. Period.

This tends to result in employees who are, for better or worse, the ultimate buy-and-hold investors. A study by the Employee Benefit Research Institute shows that even during 2000, when equities showed their biggest declines in years, employees did not shift their plan asset allocation out of underperforming stocks. One reason for this, say experts, is that some employees may still believe that their employer would never provide them with a retirement vehicle that would lose money or put their personal assets at risk. This is clearly a hangover from the days when the vast majority of companies offered defined benefit plans, in which employees were guaranteed a retirement benefit of a specific amount upon retirement, no matter what happened to the company or the market.

Some of the proposed legislative changes to ERISA seek to alter the fiduciary liabilities of plan sponsors that arrange for investment advice for their employees. These changes face some of the stiffest opposition of any of the reforms. There is serious concern among some observers that companies would most likely seek this investment guidance from the same third-party investment managers they use for investing plan assets, a situation ripe for conflict of interest--not to mention unintended consequences.

2009- You will need to read lots of other pages on fiduciary repsonsibility, particularly because the SEC is now trying to mandate brokers to that level. It will change the landscape for duty almost 180 degrees. 

2010: This is part of an extensive paper "Why Securities Arbitrations are Flawed"  EF Moody 2010


It is because of the highly effective industry marketing that I tend to give consumers some relief from their own mistakes and misconceptions about what they were doing. They did not then- nor do now- have much of any insight to allocation, correlation, et al, and simply reacted to the marketing and perception of trust and knowledge from the industry.  Much of that, I submit, is due to the physiological element of humans via the perception of trust and knowledge. To wit- the terms broker and registered representative are the terms that essentially imply that one has passed a securities exam and can sell “stuff”. They impute no sophistication or professionalism per se. Yet over the past 10 to 15 years, all sorts of monikers have popped up bestowing an alleged increase in ability, knowledge and more. The first I noted was the term Vice President, Assistant Vice President, vice president of investments and so on. And even though I am cynical, I did believe it meant ‘something’. But in acting as an arbitrator 15 years ago, it was clear that the vice president status had been ‘granted’ because the broker was pulling in over $500,000 in commission. If a broker earned $250,000 in commission, he was an assistant vice president. This is not to say all vice president status is bogus, but if all they have is a series 7 or 24 license and essentially nothing more, then the competency is suspect in real life product evaluation.

However, while the industry still uses these, during the last 5 to 10 years the firms started calling their reps ‘Financial Consultants, Financial Counselors, Financial Planners, Wealth Managers” and the like. Just go into any bank or brokerage house and pick up the cards being used. It will only be a very rare situation where you will ever see ‘registered representative’.

The point is from my acting as an expert in a 2010 arbitration. I took umbrage at the term Financial Consultant being used by a major bank/securities house where the reps had merely passed the series 7 exam. The defense asked me if there was any law/industry standard that would preclude a broker from using these monikers. There is not. But the bottom line I had was that these titles portrayed an ability far beyond that of selling a product. Further, the use of the term ‘financial’ clearly implies the ability (and licensing) to address all areas financial- insurance, taxation, diversification- effectively none of the areas truly addressed in securities licensing. Secondly, the term ‘consultant’ implies a responsibility and capability in truly analyzing a situation and preparing a comprehensive plan of action. I stated that if you present yourself as a doctor or attorney, then you must be held to those standards. If you present yourself as a financial consultant, you have presented yourself as far more than a broker and will be held accountable at that higher level. I noted that in the next 4 days of testimony, the defense attorney always called the reps “brokers” not their title of Financial Consultant. A substantial award was made in favor of the plaintiff and while I cannot claim success on the issue of monikers, I do believe that the arbitrators took note of the fact that people perceive titles as they are presented and will be held liable if they cannot meet that level of competence.

Whenever a moniker is used, it may/should become a serious mandatory issue for discussion/presentation in arbitration. The reps have a duty not to deceive- the monikers are designed for deception unless supported by some major background. 

I have used the term broker or agent throughout this paper for consistency with articles by the industry. However, for all intents and purposes, such references are indicating that such entities are not acting in the simplistic format of selling product and describing themselves as such.

There are no retail brokers. They are telling everyone that they are acting at a far greater level of competency and knowledge which they do not possess and cannot obtain in the industry. They will, however, be held to that level of responsibility.