A broker's first duty is to know the investor - to acquire necessary information about the investor's financial situation, investment goals and objectives, future needs, and risk tolerance in order to recommend suitable investments for that individual. Also, the broker must know the history and facts of the recommended investment to ensure a suitable match. Indeed, a broker in certain circumstances may have a duty to refrain from taking orders from a customer if such orders are unsuitable for the investor. Brokers must continuously reevaluate the needs of their investor clients to maintain suitability of recommended investments.
Examples of unsuitable recommendations from a broker:
- The type of securities suggested, such as high-tech or start-up companies as opposed more conservative stocks; or
- The particular strategy proposed, such as options trading rather than equity trading.
Breach of Fiduciary Duty
It is common for investors to put their complete trust and confidence with a broker based on the broker's stated expertise and superiority of knowledge in the area of investments and money management. Brokers and brokerage firms always have a duty to deal in good faith with investor clients. Many jurisdictions hold that brokers owe their securities customers a heightened duty known as a "fiduciary duty." Brokers and their firms can be held responsible for abusing the investor's trust and confidence and breaching their fiduciary duties.
Churning occurs when a broker buys and sells securities in an investor's account with excessive frequency for the purpose of generating commissions. To establish churning, the investor must establish that the broker had actual or implied control over the investor's account to make the transactions.