Fiduciary Breach FAQ

A fiduciary duty under California law is the highest standard of care and loyalty that one party (the fiduciary) owes to another (the beneficiary or principal). California Civil Code Section 1714 and California case law establish that fiduciaries must act solely in the best interests of those they serve, putting the beneficiary's interests above their own.

Fiduciary relationships arise in many contexts including trustees managing trust assets for beneficiaries, financial advisors and investment managers handling client funds, corporate directors and officers acting for shareholders, attorneys representing clients, real estate agents representing buyers or sellers, guardians and conservators caring for protected persons, and partners in business partnerships. The core fiduciary duties include the duty of loyalty (avoiding conflicts of interest and self-dealing), duty of care (exercising reasonable skill and diligence), duty of disclosure (providing complete and accurate information), duty of good faith (acting honestly and fairly), and duty to account (maintaining accurate records and reporting). California courts impose these duties strictly because fiduciaries typically have superior knowledge, access, and control over assets or decisions affecting their beneficiaries.

Breach of fiduciary duty in California occurs when a fiduciary violates any of the duties owed to their beneficiary, resulting in harm. To establish a breach of fiduciary duty claim, you must prove four elements: the existence of a fiduciary relationship between you and the defendant, the defendant's breach of their fiduciary duty through act or omission, causation connecting the breach to your harm, and actual damages suffered as a result.

Common examples of fiduciary breach include self-dealing where the fiduciary engages in transactions that benefit themselves at the beneficiary's expense, failure to disclose material information or conflicts of interest, misappropriation or misuse of trust or client funds, failure to follow instructions or the terms of a governing document, negligent management of assets or investments, commingling fiduciary funds with personal funds, and making decisions based on improper considerations. Unlike ordinary negligence, breach of fiduciary duty carries a heightened standard because of the special trust reposed in fiduciaries. California courts may shift the burden of proof to the fiduciary to demonstrate the fairness of questioned transactions, particularly when self-dealing is alleged.

Yes, you may be able to sue your financial advisor for investment losses in California if they breached their fiduciary duty or were negligent in managing your investments. However, the legal standards depend on your advisor's regulatory status and the type of relationship you had. Registered Investment Advisors (RIAs) registered with the SEC or California Department of Financial Protection and Innovation owe a fiduciary duty to clients under the Investment Advisers Act of 1940 and California Corporations Code Sections 25230-25244. They must act in your best interest and disclose all conflicts.

Broker-dealers and their representatives historically operated under a lower suitability standard, though SEC Regulation Best Interest now requires recommendations be in clients' best interest. The nature of your claim—fiduciary breach, negligence, fraud, or unsuitable recommendations—determines the applicable standard. Common grounds for claims include recommending unsuitable investments given your risk tolerance and objectives, excessive trading (churning) to generate commissions, failure to diversify appropriately, misrepresenting investment risks or characteristics, and unauthorized trading. Many brokerage agreements contain mandatory arbitration clauses requiring disputes be resolved through FINRA arbitration rather than court litigation.

California Probate Code Sections 16000-16015 comprehensively define trustee duties. The duty of loyalty (Section 16002) requires trustees to administer the trust solely in the interest of beneficiaries, avoiding conflicts of interest and self-dealing transactions. The duty of impartiality (Section 16003) requires fair treatment of all beneficiaries when a trust has multiple beneficiaries with different interests. The duty to avoid conflicts (Section 16004) prohibits trustees from using trust property for their own benefit or engaging in transactions where they have an interest adverse to beneficiaries.

The prudent investor rule (Section 16047) requires trustees to invest and manage trust assets as a prudent investor would, considering the purposes, terms, distribution requirements, and other circumstances of the trust. Trustees must diversify investments unless special circumstances make it prudent not to do so. The duty to inform and account (Sections 16060-16064) requires trustees to keep beneficiaries reasonably informed about trust administration and to provide accountings upon request or as required by the trust. Additional duties include the duty to preserve trust property, collect trust assets, enforce claims, and defend against claims, maintain adequate records, and exercise reasonable care, skill, and caution in all trust matters.

The statute of limitations for breach of fiduciary duty claims in California depends on the specific type of fiduciary relationship and the nature of the breach. For general fiduciary duty claims, California Code of Civil Procedure Section 343 provides a four-year statute of limitations for actions not otherwise provided for by statute. However, specific relationships have different limitation periods.

For trustee breaches, Probate Code Section 16460 provides a three-year statute of limitations from the time the beneficiary discovers, or reasonably should have discovered, the breach, subject to certain exceptions. For claims against financial advisors, the limitations period may be two years for fraud or four years for breach of fiduciary duty, depending on how the claim is characterized. The discovery rule is particularly important in fiduciary breach cases because fiduciaries often have superior access to information and beneficiaries may not immediately discover wrongdoing. The statute begins running when you actually discover the breach or when a reasonable person would have discovered it through exercise of reasonable diligence. If the fiduciary fraudulently concealed the breach, the statute may be tolled. Given these complexities, consult an attorney promptly upon suspecting fiduciary misconduct.

Damages for breach of fiduciary duty in California are designed to restore you to the position you would have been in had the fiduciary performed properly, and may include disgorgement of the fiduciary's ill-gotten gains. Compensatory damages include actual financial losses caused by the breach such as investment losses, misappropriated funds, or diminished asset values. Lost profits that would have been earned but for the breach are recoverable if proven with reasonable certainty. The cost of correcting or mitigating the breach's effects, including fees paid to replacement fiduciaries and professional advisors, may be recovered.

Under California Civil Code Section 3294, punitive damages are available if the fiduciary acted with fraud, oppression, or malice, which often occurs in egregious self-dealing cases. Unique to fiduciary breach claims, you may seek disgorgement—requiring the fiduciary to forfeit any profits or benefits they gained from the breach, even if those profits exceed your actual losses. Fee forfeiture may require the fiduciary to return some or all compensation received during the breach period. For trust cases, Probate Code Section 16440 authorizes courts to remove trustees, compel accountings, reduce or deny compensation, and impose surcharges equal to the loss caused by the breach. Attorney's fees may be recoverable from the trust or under specific contractual provisions.

California Probate Code Section 15642 provides grounds and procedures for removing a trustee who has breached their duties. A beneficiary, co-trustee, or other interested person may petition the probate court for removal. Grounds for removal include breach of trust, failure to comply with court orders, conviction of a felony, being unfit to serve due to lack of capacity, excessive compensation, or being substantially unable to perform duties.

The petition must identify the trustee and trust, state the grounds for removal with supporting facts, and request specific relief including appointment of a successor trustee if applicable. After filing, notice must be provided to all interested parties, and a hearing will be scheduled. At the hearing, you must present evidence of the trustee's misconduct—accountings showing mismanagement, documentation of self-dealing transactions, evidence of failure to communicate, or expert testimony on prudent trust administration. The court has broad discretion in fashioning remedies and may remove the trustee, suspend the trustee pending investigation, require a bond, appoint a temporary trustee, order an accounting, or impose other conditions. Even if removal is not granted, the court may order corrections to trustee conduct. Trustee removal actions can be contentious, so working with an attorney experienced in trust litigation is advisable.

Corporate directors and officers in California owe fiduciary duties to the corporation and its shareholders under California Corporations Code Sections 309 and 7231. The duty of care requires directors to perform their duties in good faith, in a manner they believe to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. This includes becoming informed before making decisions, attending meetings, monitoring corporate affairs, and making reasonable inquiries when circumstances warrant.

The duty of loyalty requires directors to act in the corporation's best interests rather than their own personal interests. Directors must avoid conflicts of interest, cannot usurp corporate opportunities for themselves, and must maintain confidentiality of corporate information. Self-interested transactions are not automatically void but must be fair to the corporation and properly disclosed and approved under Corporations Code Section 310. The duty of good faith requires honest and fair dealing. The business judgment rule protects directors from liability for good-faith business decisions that turn out poorly, presuming directors acted on an informed basis and in honest belief the action was in the corporation's best interests. However, this protection does not apply to breaches of loyalty, gross negligence, or decisions made without reasonable inquiry.

Yes, you can file complaints against financial advisors with multiple regulatory agencies in California, though the appropriate agency depends on the advisor's registration and the nature of misconduct. For stockbrokers and brokerage firms, file complaints with FINRA (Financial Industry Regulatory Authority), which regulates broker-dealers and their representatives. FINRA investigates complaints, can impose fines and suspensions, and maintains BrokerCheck where you can research advisors' disciplinary histories.

For registered investment advisors, file with the SEC if the advisor manages over $100 million in assets, or the California Department of Financial Protection and Innovation (DFPI) for state-registered advisors managing under $100 million. The DFPI, under California Financial Code provisions, can investigate complaints, conduct examinations, and impose discipline including license revocation. For insurance-related products or advisors who are insurance agents, file with the California Department of Insurance, which regulates insurance producers under Insurance Code Section 1668 and can impose penalties for misconduct. Regulatory complaints serve different purposes than civil lawsuits—they protect the public by disciplining wrongdoers but generally don't provide direct monetary compensation to complainants. However, regulatory findings can support civil claims, and agencies may refer cases for criminal prosecution in egregious circumstances.

The distinction between fiduciary and suitability standards has significant implications for financial advisor accountability and client protection in California. The fiduciary standard, which applies to Registered Investment Advisors under the Investment Advisers Act of 1940 and California Corporations Code, requires advisors to act in their clients' best interests at all times, placing client interests ahead of their own. Fiduciaries must disclose all conflicts of interest, provide the most cost-effective suitable options, and maintain ongoing duties throughout the relationship.

The suitability standard, which traditionally governed broker-dealers under FINRA rules, only required recommendations be suitable for the client at the time made, considering factors like age, investment objectives, and risk tolerance. A suitable recommendation could be more expensive or generate higher commissions for the advisor as long as it fit the client's general profile. SEC Regulation Best Interest, effective since 2020, raised the standard for broker-dealers, requiring recommendations be in the client's best interest and enhanced disclosure of conflicts, but critics argue it falls short of a true fiduciary standard. Understanding which standard applies to your advisor is crucial because fiduciary advisors have greater accountability. Always ask your advisor directly whether they are acting as a fiduciary, and get that confirmation in writing.