Fiduciary Duty of a Brokerage Account

Brokerage fiduciary standards help people build wealth.

Financial brokerages operate as intermediaries between corporations and private investors. Because of the amount of money involved, financial markets largely operate on trust to function properly. Securities law defines the fiduciary duty of brokerage accounts to inspire confidence.

Identification

The Securities and Exchange Commission describes brokers as individuals and entities that execute financial transactions on your behalf. Most people do not have access to the stock exchange trading floor, and must clear investment trades through brokers.

Features

Brokerages carry a fiduciary duty to secure the best price available for your authorized trades at any given moment. Beyond simply clearing trades, full-service brokers are required to propose investment recommendations in line with client objectives.

Considerations

The fiduciary duty requires brokers to disclose potential conflicts of interest to clients. For example, brokers may sometimes operate as dealers, where firms sell their own investment holdings to account holders.

Effects

Securities law reinforces an emphasis on financial education for both brokers. Brokers are required to pass examinations to become and remain licensed.

Warning

Despite stringent securities laws, brokers may violate their fiduciary duty. Churning is a tactic where brokers propose numerous financial trades designed merely to generate expensive commissions, rather than to build wealth.

References

• SEC: Check out Brokers and Investment Advisers
• SEC: Guide to Broker Dealer Registration
• Investopedia: Fiduciary

Resources

• Investopedia: Churning
• Investopedia: Meeting Your Financial Responsibility