Agent or Fiduciary?

The line between brokers and fiduciaries has gotten blurry. When does a broker cross over?

Q:

I underwent a grueling arbitration hearing this year. One point the complainant's attorney tried to make was that I had acted in a fiduciary capacity by purchasing and allocating a variable annuity for my clients. I maintained I had no fiduciary responsibility but had merely recommended and sold an appropriate product to meet this client's needs. When is a broker or a financial planner a fiduciary?

A:

The designation “fiduciary” used to mean something special in both the legal and the brokerage worlds. It carried an obligation to perform one's duties to the highest standards. It also carried with it higher degrees of liability for those who faltered in meeting their obligations. Likewise, in the past, claimant's counsel often argued that since the broker made the investment recommendations to the investor and was compensated for his or her services through commissions, the firm and its broker were fiduciaries. Brokerage firms frequently and successfully fought these allegations.

Today, the lines are less clear for several reasons: the increased significance of asset management, including for ERISA plans and other retirement accounts; the extensive licensing of brokers as investment advisory representatives so they may participate in fee revenues; and an emphasis on promoting financial planning as a core investment tool.

Most brokers continue to take the position that in the routine performance of their duties, including providing clients with investment recommendations, no fiduciary relationship is established. At most, there is a principal-agency relationship created. The duties and liabilities of an agent fall short of those imposed on fiduciaries.

Generally, it's only if the broker is appointed to serve in a unique role regarding the client and his or her investment assets, and knowingly and voluntarily accepts this heightened duty — by exercising discretionary authority over the client's account or expressly agreeing to serve as a fiduciary — that a higher level of liability is attached to the relationship. By assuming greater duties and responsibilities, the broker incurs greater potential exposure.

In your situation, the lawyer was apparently trying to cast you as a fiduciary to impose upon you elevated standards of duty and care and deprive you of various defenses that may be available to a broker, but not to a fiduciary. The lawyer may have tried to show that the client relied exclusively on your advice, acted upon it without hesitation and then argued because of those factors you should be held to the higher fiduciary standards.

Based on your question and the brief description of your relationship to the client and transactions at issue, you should not have been held by the panel to be a fiduciary. Assuming that the specific recommendations were appropriate for the investor at the time they were made, the investor made the ultimate decision to act on your counsel or reject it. You did not exercise control over the account. The panel should have viewed you as a broker, not a fiduciary, and dismissed those claims against you.
Jonathan Harris
Lindquist & Vennum
Minneapolis
612-371-2492

[email protected]

A:

A fiduciary relationship exists when one person (a client) puts trust and confidence in another (a broker), who accepts the responsibility and agrees to work solely for the benefit of the client to the exclusion of personal interests. Fiduciary relationships are consensual. The existence of consent, however, is determined by the circumstances surrounding their relationship — not just what the broker or the client says.

The particular case you describe is a simple one. In my view, most arbitrators would not find a fiduciary relationship. The mere recommendation of a suitable investment to a client who accepts the recommendation typically doesn't give rise to a fiduciary relationship.

I suspect, however, that the complainant's lawyer thought there were other circumstances that gave rise to fiduciary obligations. In evaluating whether a fiduciary relationship exists it is sometimes useful to think in terms of a spectrum. At one end of the spectrum, you have a client who provides a limited power of attorney to the broker to trade the account. In this instance it will typically be determined that a fiduciary relationship does exist. At the other end of the spectrum is the case you describe, where a broker makes a plain-vanilla recommendation of a suitable security to a financially sophisticated client.

The majority of cases, however, fall in the vast middle ground. Various elements can play a role. Age and financial sophistication are important factors to be considered. For example, if you made the recommendation you describe to a 70-year-old widow with a high school education, the relationship would fall closer to the end of the spectrum where there is a fiduciary obligation. If the recommendation consisted of an unsuitable security, or the client had to liquidate other assets to make the purchase and incurred additional sales charges as well, you move closer still, and might even cross the threshold into fiduciary territory.

Regardless of the suitability of securities recommended, if you frequently make recommendations of securities sales and purchases and the client always (or virtually always) follows the recommendation without question, you are probably standing just inside the realm of fiduciary obligation. That is, unless you have taken affirmative steps to deny assumption of that responsibility — e.g., receiving periodic activity letters in which the client acknowledges that he or she is making all decisions and understands those decisions. You may want to consider follow-up calls by a branch manager or other third party to confirm the client's intent.

These are just a few of the “fiduciary relationship” factors that are commonly evaluated. Your compliance officer or legal department can advise you of others.
Timothy Carey
LeBoeuf Lamb Greene & MacRae
Chicago
312-794-8060

[email protected]

Not sure whether you have to pay back a forgivable loan? Seen a work colleague do something that makes you squeamish?

Don't fret. Send your questions to Registered Rep. Contributing Editor Ann Therese Palmer at [email protected]. Then, look for an answer in a future Ethical Rep column. Anonymity guaranteed.

The Ethical Rep.
Registered Rep.
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New York, N.Y. 10011-5300
[email protected]
Fax: 913-514-3890.

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