In a recent British Columbia Supreme Court case, Longstaff v. Robinson and IPC Investment Corporation, the plaintiff alleged that his broker had a fiduciary duty to him which had been breached, in addition to breaching contractual and tort duties.
In the spring of 1999, Mr. Robinson (the broker) recommended that Mr. Longstaff (the client) borrow $200,000 in order to leverage his investments. Because of a dramatic downturn in the stock market, Mr. Longstaff suffered financial losses, which he sought to recoup from Mr. Robinson.
Mr. Longstaff argued that Mr. Robinson had breached his fiduciary duties in recommending that Mr. Longstaff switch to a leveraged investing plan. Mr. Longstaff submitted that Mr. Robinson promoted this plan and frightened Mr. Longstaff into borrowing $200,000 for the purpose of purchasing investments so that Mr. Robinson could earn a substantial commission. Mr. Longstaff argued that the advice was motivated by self-interest and was given in breach of Mr. Robinson’s fiduciary obligations to provide comprehensive and selfless advice.
The court found that the advisor/client relationship could be elevated to a fiduciary relationship if the client reposes trust and confidence in the advisor and relies on the advisor’s advice to make business decisions. In considering whether there is a fiduciary relationship in an advisory situation, the courts consider whether the relationship included the presence of vulnerability, trust, reliance on the advisor’s discretion, and the existence of professional rules or codes of conduct.
The court found that, in this particular case, a fiduciary relationship existed because the client was an unsophisticated investor with a limited education who had minimal experience in making financial investments and had placed his complete trust and confidence in his broker. The client had relied on the broker to properly advise him and had followed all of the broker’s recommendations.
A fiduciary relationship requires the investment advisor to act consistently with the trust reposed in him by the client and not to betray the trust out of self-interest. To succeed on the claim for breach of fiduciary duty, the client must establish that the broker placed his personal interests before those of his client and took advantage of the relationship for his direct or indirect personal advantage. In this case, the court found that there was no evidence to substantiate the allegation that Mr. Robinson recommended a leveraging strategy to earn higher commissions.
The court stated that to establish a breach of fiduciary duty, more is required than the mere fact that the advisor earned commission income on a transaction. So, while the court did find that there was a fiduciary relationship, the broker did not breach his fiduciary duties and thus was not liable to his former client.