Understanding your stockbroker’s fiduciary duty

When your stockbroker takes your money to invest on your behalf, he or she must follow certain rules and regulations. Investments have regular ups and downs as the market fluctuates. Therefore, you may have to look very closely at your portfolio’s performance, along with charges and fees, to determine that your stockbroker has done anything wrong. The bottom line is that your broker owes you a fiduciary duty.

What is a fiduciary duty?

You may have heard the term fiduciary duty used in many different contexts. Many people who act in a role where other people entrust them with their assets or funds must abide by a fiduciary duty. Examples include trustees of a trust, the personal representative of a probated estate and officers of a corporation. All of these people owe a duty of loyalty and care to the people or entities they represent. They are supposed to act in a reasonable manner on behalf of the entity, treating the assets the way the owner would treat them.

Duties depend on the type of account

When looking at your stockbroker’s fiduciary duty, you must look at the type of account they are handling for you. The three main types of accounts include:

Discretionary – A discretionary account gives your account executive, or broker, broad fiduciary powers. Although he or she must keep you apprised of market changes and transactions, along with the risks and benefits involved, they do not need your authorization to take action. They must manage the account responsibly and according to the objectives you agreed upon.

Non-discretionary – A non-discretionary account allows the customer to make decisions about purchases and sales. The broker must act in the customer’s interest up to closing the transaction by making sound and honest recommendations, relay any risks involved, comply with the customer’s orders in a timely way and not engage in any self-dealing or misrepresentation. Once the deal is closed, the broker no longer owes a duty to the customer.

Hybrid – With a hybrid account, the account executive takes control of a non-discretionary account. When they do this, they must apply the same fiduciary duty as if the account had started out as discretionary.

Stockbroker misconduct can take many different forms resulting in misrepresentation and fraud. Some actions may even rise to the level of a criminal offense. If you suspect your stockbroker is not abiding by his or her fiduciary duties to you, consult with a legal professional to discuss your options.