Financial planning lawsuits are a type of civil lawsuit that occurs when one party, often a professional financial advisor, causes another party, often an investor, to suffer a loss due to faulty financial advising.
In the business context, financial planning lawsuits occur when a business organization contracts with an outside group of financial professionals to do financial consulting for them, which results in the business suffering financial harm. In general, these types of contractual and fiduciary arrangements are typically made according to a services contract, which outlines the risks and liabilities for each party.
In some cases, a financial advisor may be hired to help a business draft a workable financial business plan. In most cases, a principal-agent relationship will be created upon the hiring of the financial advisor. This means that a fiduciary relationship will then exist between the financial advisor and their client.
Once a fiduciary relationship has been created, the financial advisor or financial planner will owe a duty of care to their client to ensure that the financial plans are in the best interests of their client. Then, if the fiduciary agent violates their duty of care a financial planning lawsuit may occur.
What Are Some Common Reasons for Filing a Financial Planning Lawsuit?
Once again, financial planning professionals owe a duty of care to their clients. As such, any violations of that duty may result in a financial planning lawsuit. Examples of common violations of a financial planning professional may include:
- Using company funds or company insider information for their own profit;
- Failing to invest company resources according to “prudent business judgment” or investing in companies where the financial professional profits from the investment themselves.
- It is important to note that such investments are typically referred to as self-dealing;
- Disclosing company trade secrets or other protected intellectual property to a competing business;
- Commingling their client’s money with their own personal financial accounts; or
- Otherwise breaching their fiduciary duty of loyalty to their client in any other way.
It is important to note that financial advisors cannot know every detail about future events, such as market conditions or trends. However, financial professionals are still expected to exercise a reasonable amount of foresight when helping to create and implement financial plans for their clients.
What Is Considered a Breach of Fiduciary Duty?
Once again, a financial planning professional may be civilly sued for breaching their fiduciary duty. The legal term fiduciary refers to a person that has created either a legal or ethical relationship of trust with someone else. Such a relationship is generally created by contract.
Then, once a person has a fiduciary duty to another person, most often a client, the fiduciary must then conduct themselves according to the benefit of that other person. In a fiduciary relationship, the person to whom the duty is owed is often referred to as the principal or the beneficiary.
One of the most important fiduciary duties is the obligation of the fiduciary to act for the beneficiary’s benefit, and not for the fiduciary’s benefit. In general, fiduciary duties are categorized in three ways:
- Duty of Care: A fiduciary is expected to use the amount of care that any ordinarily prudent person would exercise in a similar professional position.
- For instance, a fiduciary has a duty to treat the property or money that they are entrusted to manage and protect as their own;
- Duty of Good Faith: The fiduciary is also tasked with the duty of acting with conscious regard for their responsibilities as a fiduciary.
- This means that the fiduciary must not act in any fraudulent or deceitful way, to the detriment of the beneficiary.
- For example, a fiduciary that uses their client’s money to invest in a business in which they gain a profit for any investments, is considered to be a violation of a fiduciary’s duty of good faith; and
- Duty of Loyalty: The duty of loyalty means that the fiduciary must act for the benefit and advantage of the beneficiary without making any decisions that would be disadvantageous for the beneficiary.
- Importantly, a fiduciary may not make any decisions on behalf of the beneficiary out of self-interest or for their own benefit, such as self-dealing.
It is important to note that a fiduciary’s duty of loyalty is vast, and the breach of the duty of loyalty is often the most cited breach of fiduciary duty in financial planning lawsuits.
What Is the Fiduciary Duty of Loyalty?
As noted above, one of the most important fiduciary duties is the fiduciary duty of loyalty. In short, fiduciaries must not be involved in any self-dealing transactions, conflicts of interest, or any other abuses of their client or beneficiary for their own personal advantage.
As such, when making any transactions or financial planning decisions on behalf of the principal, the fiduciary must avoid the following:
- Misappropriating Business Opportunities: Fiduciaries must not seize a business opportunity for their own benefit.
- This means that a fiduciary has an obligation to disclose and offer any advantageous business opportunity to their client when that opportunity clearly belongs to the client;
- Making Interested Transactions: Fiduciaries are entrusted with their client’s property and money, and they must not make interested transactions using the property entrusted to them.
- For instance, a fiduciary may not buy or sell assets, make any type of personal profit, or make any self-dealing transactions using the money or property that has been entrusted to them; and
- Breaking Their Duty of Confidentiality: A duty of loyalty also requires that the fiduciary maintain confidentiality regarding all financial decisions and private information with which they have been entrusted.
- A client may not wish for public disclosure of their private matters.
- In general, a fiduciary is prohibited from disclosing information about their client’s property or transactions.
- Breaching a confidentiality clause is a common reason for a financial planning lawsuit being filed against the financial planning professional.
What Can Be Done About a Breach of Fiduciary Duty?
Once again, breaches of fiduciary duty may occur in several different ways. However, breaches most commonly occur when the fiduciary acts in any way that benefits themselves. Fraudulent conduct will also constitute a breach of fiduciary duty. In the case of fraud, the fiduciary may also be criminally prosecuted for the violation and the underlying offense of fraud.
In order to recover damages for a breach of fiduciary duty, the party that was financially harmed (i.e., the claimant) must demonstrate:
- That the fiduciary occupied a position of trust by providing evidence of a fiduciary relationship having been created, such as by contract;
- That the fiduciary acted in a manner that benefited them personally while in the scope of their fiduciary relationship with the claimant;
- That the duty of care owed to the claimant was breached by the fiduciary; and
- That the breach resulted in the claimant suffering quantifiable financial damages.
If a claimant brings a civil claim against the fiduciary, the claimant may receive a damage award for any lost profit, due to the breach of the fiduciary, if they are successful in their financial planning lawsuit.
The claimant may also receive restitution to recover any profits that the fiduciary unlawfully gained to the claimant’s detriment. Further, it may be possible for the claimant to also recover profits gained by the fiduciary even if the claimant themselves did not actually suffer any harm.
For example, in the case where the financial planning professional was presented with an opportunity for their client’s business, and then the professional took and profited from the opportunity themselves, the business may sue for those ill gotten profits.
In addition to the above remedies, a financial advisor or fiduciary may also lose their professional operating license or face other professional penalties.
Do I Need a Lawyer for Help with a Financial Planning Lawsuit?
If you are in a fiduciary relationship, and the fiduciary agent has breached their duty of care resulting in you suffering financial harm, then it may be in your best interests to consult with an experienced financial lawyer.
An experienced financial lawyer will be familiar with your state’s laws on fiduciary relationships and breach of contract actions. As such, an attorney will be able to help you determine your best course of legal action for recovering any money that was lost or profits that were lost as a result of the breach of fiduciary duty.
An attorney can also help gather all of the necessary evidence to be successful in a financial planning lawsuit. An attorney can also initiate the financial planning lawsuit against the party that is responsible for your losses. Finally, an attorney can also represent you in court, as needed.
