In some circumstances, financial advisors may come to owe their clients fiduciary duties. This is dependent on a number of circumstances and can have varying effects on the relationship and importantly, on the advisor’s responsibilities to the client. Breach of these fiduciary duties of financial advisors gives rise to various modes of recovery for the client. In this article we discuss what a fiduciary duty is, how it can arise and what fiduciary duties financial advisors may owe their clients.
What is a Fiduciary Duty?
Fiduciary duties compel the party undertaking the responsibility to place the interests of their client ahead of their own. Fiduciary duties are generally negative in nature, meaning they prevent certain actions being taken but rarely impose some positive duty to act. For example, fiduciaries must not profit to the detriment of their client and must avoid conflicts of interest. The duty is strictly interpreted, requiring the fiduciary to avoid even the perception of conflicting interests. For this reason, fiduciary duties may in some circumstances be breached even where the fiduciary has not acted dishonestly or with an intention to defraud the client, or where the client has not suffered a loss despite fiduciary misconduct.
A. Where Can Fiduciary Duties Arise?
Fiduciary relationships arise in many common professional arrangements, such as that between a company director and their organisation, between lawyer and client or between a financial advisor and client. The fiduciary will generally take some responsibility for acting in a way that can affect the client’s interests, thereby making the client reliant on the loyalty of the fiduciary. The source of the duty is the trust and reliance placed in the fiduciary by the client, as is common where retail clients consult professional service providers for advice.
B. Can Financial Advisors Owe Fiduciary Duties?
Fiduciary duties of financial advisors can arise both through the common law principles developed over the years and through the statutory scheme of responsibility outlined in the Corporations Act 2001 (Cth). At general law in cases such as Daly v Sydney Stock Exchange, where a financial services provider provides specialised advice to a client in circumstances where the client is reliant on the advisor’s expertise, a fiduciary duty can be held to arise. This has since been strengthened through legislative amendments; in particular Part 7.7A, Division 2 of the Corporations Act. Division 2 requires financial services providers to act in the ‘best interests’ of their client. This imparts something of a positive duty, in that it requires providers to act reasonably to understand the client’s needs and interests and to provide appropriate advice to them on that basis.
C. What Can Happen to Fiduciaries Who Breach their Duty?
Financial Advisors who fail to meet the high fiduciary standards of loyalty and competence can be penalised under both the general law and the Corporations Act. Fiduciaries who improperly profit can be made to provide those profits to the client, detriment suffered by a client due to fiduciary misconduct can be compensated and contracts between the parties can be terminated where beneficial to the client. Under the legislation, financial penalties can be levied and financial service providers who have acted improperly can be disqualified from practicing.
Fiduciary duties of financial advisors can arise where a party undertakes responsibility to provide professional advice to a client who is reliant on the provider’s loyalty and competence. Financial advisors who deal with retail clients are a prime example. Not every interaction between an advisor and client will be fiduciary in nature and not every action undertaken will have the protection of fiduciary duties. If you would like more information on what duties your advisor may owe you or you feel that your advisor may have acted improperly and is in breach of their obligations to you, seek legal representation.
This article was authorised by Warwick Heeson.