August 3, 2010
If you want our ineffective regulators or Congress to define “fiduciary,” in a helpful way don’t hold your breath. Look, for example, at the what I like to call the "Empowering Everybody Provision" (PPA, 2006 through Pension Reform, 2010) and its all-encompassing definition of the meaningless term "Fiduciary Advisor," which includes:
- A registered investment advisor
- A bank through its trust department
- A savings association that is subject to periodic examination and review by a federal or state banking authority
- A state qualified insurance agency
- A broker or dealer (’34 Act registered)
- An affiliate of any of the above, and
- Employees, agents or registered representatives of all of the above.
So, are stockbrokers fiduciaries? Absolutely!
For instance, take the 1986 case, Stanton v. Shearson Lehman in which a federal court found that a brokerage firm retained to handle pension assets was an ERISA fiduciary. The firm was directly liable for failing to exercise care and prudence in supervising and training its brokers who caused a loss to an ERISA plan.
In that case, the beneficiary of two retirement funds decided to self-direct them and opened two trading accounts with a Shearson account representative. The representative made investment recommendations to the beneficiary, who then instructed that those trades be made. All told, the clients paid the firm $87,000 in commissions, and the trustees sued the firm and the broker for violating ERISA. The court ruled in favor of the trustees. "If a broker executes transactions in accordance with trustee instructions with respect to investment recommendations the broker made, then this is sufficient to warrant fiduciary responsibility and the liability thereto."
The question turned on reliance. If a client relies on advice, implements a broker's recommendations and the broker knows or should be expected to know this, then he or she will be liable for that advice.
Liability can extend to improper selection of a money manager, inadequate reporting, setting improper investment objectives, insufficient monitoring and evaluation of fund or manager performance, or even the recommendation to replace or interview new managers.
Would you like to send this article to a friend?Remember, if you have a question or comment, send it to .