Fiduciary duty is a legal concept requiring individuals in certain professions – including lawyers, trustees, and investment advisers – to prioritize their clients’ best interests over their own. A fiduciary obligation arises whenever the relationship with the client (often referred to as the “beneficiary” or “principal”) involves a special trust, confidence and reliance on the fiduciary to exercise his/her discretion or expertise in acting on the client’s behalf.
In the case of investment advisers, the fiduciary relationship imposes two broad duties towards their clients:
1. Duty of Care: Advisers must, at all times, (i) provide advice that is in the client’s best interest, (ii) seek best execution and (iii) act and provide advice and monitoring over the course of the relationship.
2. Duty of Loyalty: Advisers must (i) make full and fair disclosure to its clients of all material facts related to the advisory relationship and (ii) eliminate or at least expose all conflicts of interest which might incline her/him—consciously or unconsciously—to render advice which was not disinterested.
Are All Financial Professionals “Fiduciaries”?
The short answer—no. The term “fiduciary” is not a singular title or designation given to an individual such as “CFA” (Chartered Financial Analyst) or “CFP” (Certified Financial Planner). Whereas all investment advisers are fiduciaries, broker/dealer representatives are held to a lesser legal standard of care called the “suitability standard,” which requires them to offer advice and product recommendations that are merely suitable for their clients. Such advisors can be incentivized to recommend investment products that are in their own best interests – for example, those with higher fees or commissions – rather than their clients’.
We urge investors to ask prospective financial professionals whether or not they are fiduciaries; by law, they are required to disclose fiduciary status.