Recently a client called us and asked if his investment firm that sold him Platinum Partners related investments might be liable for the losses sustained. The simple answer is possibly, yes. Many registered investment advisors (RIAs) heavily sold Platinum Partners to clients. The resulting losses have been devastating. Fortunately for these victims, RIA’s have very specific, detailed duties to clients, including a fiduciary duty. In 1963, the U.S. Supreme Court ruled that Section 206 of the Investment Advisers Act imposes a fiduciary duty on RIAs. Securities Exchange Commission v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963), was the Supreme Court’s first interpretation of the Investment Advisers Act. To this day, the case is cited frequently by lower courts and the SEC in enforcement actions.
A fiduciary obligation is one that goes beyond the suitability standard typically owed by registered representatives of broker-dealer firms to their clients. The relationship between an RIA and the firm’s clients is built on the premise that the investment advisor will always do the right thing for the person or entity receiving advice. It is a special relationship that does not exist between most businesses providing services to their customers. In June of 2009, a group of investment industry leaders formed The Committee for the Fiduciary Standard and called on Congress to adopt an authentic fiduciary standard. This committee put forth a list of five core principles of the fiduciary standard to help individual investors make the distinction between an investment advisor’s fiduciary standard and a broker’s suitability standard (Figure 8-1). These include:
Put the client’s best interest first