The more influential you are with your clients, the greater your legal duty
Say all you do is recommend investment ideas to your clients and charge them brokerage commissions. You don’t execute their trades without their prior consent and you don’t charge them an advisory fee. In your mind, you’re just a broker, and your responsibility to your clients is simply to have a reasonable basis for the investment recommendations you make to them. You don’t think of yourself as their investment advisor, and you certainly don’t think you have discretion over their accounts.
Well, don’t be so sure. If you happen to be particularly influential with your clients, your legal obligations to them may be greater than you think.
Believe it or not, you could become an “investment advisor” to a client without assuming that role in writing if the relationship between you and your client is deemed to be one of trust and confidence. Your behavior could rise to that level legally in either of two ways. First, if you are the primary source of information, opinions or recommendations on which your client relies in making its investment decisions, a court could later decide that you were effectively acting as its ‘fiduciary’. Similarly, if your client follows the vast majority of your investment recommendations, you may also have legally assumed the role of its trusted advisor. In achieving either of these two results with a client, you may have unwittingly taken on legal duties and foreclosed business opportunities for yourself that would both surprise and trouble you.
For one thing, being a ‘fiduciary’ to a client precludes you from taking the opposite side of a transaction from your client without its express and informed consent. Even having its consent will not save you if your client is an IRA or other tax-qualified account covered by ERISA. As a result, any business or investment transaction in which an asset is transferred between you and your client could be a breach of your duty of loyalty to the client, even if the terms of the transaction with you are more favorable to your client than those otherwise available in the marketplace. Your fiduciary duty of loyalty requires you to place your client’s interests above your own (or those of any third party), a condition which may not be achievable in a transaction where you and your client are on opposite sides.
Further, as a ‘fiduciary,’ you may not divert a business opportunity to yourself that would otherwise be available to your client. You also may not benefit or profit from the position of trust you have assumed without your client’s specific consent. Your duty of loyalty therefore requires that you evaluate every business opportunity that comes your way from the vantage point of your client. If you get it wrong, you may have to remit to your client whatever personal benefit or profit you procured by virtue of your status as its ‘fiduciary.’
An equally important legal obligation of a ‘fiduciary’ is the duty of care, which requires you to act ‘prudently’ in regard to the matter with which you have been entrusted. ‘Prudence’ is a much stricter standard of care than ‘reasonableness,’ which is the legal standard that applies generally to business and interpersonal relationships. ‘Prudence’ presumes expertise on the part of a ‘fiduciary’providing professional services. Be aware, therefore, that your behavior in regard to your client could be judged against the standard of care applicable to a professional investment advisor, and a court will hold you to that standard if your client later complains about your conduct.