In financial services, advisers are always looking for a way to stand out and attract new clients. For many, the answer lies in a simple, five-syllable word: fiduciary.
It’s a term often thrown around in discussions about ethical practices and trustworthiness, but what exactly does fiduciary duty entail, and how does it shape the way financial advisers operate? In a landscape where clients are seeking not only expertise but also unwavering honesty, comprehending the nuances of fiduciary duty is integral in building trust with clients and prospects.
Today, we’re exploring what “fiduciary duty” means in the context of financial services, who it applies to and the basic tenets of fiduciary duty as set forth by the Securities and Exchange Commission (SEC).
What is the fiduciary duty for advisers?
“Fiduciary duty” isn’t an industry-specific term; in fact, lawyers and guardians are often considered fiduciaries. That’s because “fiduciary” simply refers to the legal duty to act in the best interest of the established counterpart.
In the financial world, many professionals are considered “fiduciaries.” At a high-level, that means that they are legally obligated to maintain trust with clients, act in their best interest and provide the best possible advice given the information available to them. The rule was originally implemented in the Investment Advisers Act of 1940 to protect investors from advisers acting with malicious or manipulative intent.
Not all financial advisers/professionals are subject to fiduciary duty – there are broker-dealers, registered representatives and other financial professionals who need only meet the suitability rule requirements. Forbes writes: “Most financial advisers, even if they aren’t fiduciaries, have to somewhat consider your interests when offering advice. Only fiduciary financial advisers have to place your best interest over theirs, though.”
Essentially, a non-fiduciary can give out advice that “suits” their client’s needs (even if it’s not the best option available). A fiduciary, however, must give their clients the best options available depending on their needs and options – regardless of how it affects their own bottom line.
Certified Financial Planners® (CFP) are usually fiduciaries, as are most advisers working under the umbrella of an RIA.
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The Fiduciary Rule Back in 2017, the Department of Labor (DOL) was in the process of implementing the “Fiduciary Rule,” which would expand fiduciary duty to any professionals who were giving investors retirement advice, solicitation or recommendations – including brokers and investment firms. The rule was widely debated, with many concerned over how already established broker-dealers and investment firms would maintain a profit given increased compliance costs and lower commissions. By June of 2018, the Fiduciary Rule was officially vacated. Although there has been talk of the Fiduciary Rule’s potential comeback via the DOL and SEC, no significant movement has been made in recent years. |
What is an adviser’s fiduciary duty? Two main components
The SEC defines two major tenets of investment adviser fiduciary duty, among others: Duty of Care and Duty of Loyalty. Let’s explore these more in-depth.
Duty of Care
Duty of Care includes three subcategories:
- Duty to Provide Advice that is in the Client’s Best Interest
- Duty to Seek Best Execution
- Duty to Act and to Provide Advice and Monitoring over the Course of the Relationship
The CFP has released a comprehensive guide to fulfilling the Duty of Care requirement, from which the below image was provided.
Image courtesy of the CFP Board
As you can see, this duty requires advisers to thoroughly understand each client’s financial situation, goals and risk tolerance before making recommendations. Advisers must diligently research and analyze investment options, providing well-informed suggestions that are grounded in the most accurate information available.
Additionally, fiduciaries must implement ongoing monitoring to ensure financial plans are on track amid changing market conditions, as well as keep up clear communication about relevant risks and costs.
By adhering to the principles of the Duty of Care, fiduciary advisers build trust, promote transparency and work to achieve the optimal financial outcomes for their clients.
Duty of Loyalty
The SEC writes:
“The Duty of Loyalty requires an investment adviser to put its client’s interests first. An investment adviser must not favor its own interests over those of a client or unfairly favor one client over another. In seeking to meet its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship.”
In essence, advisers must put clients’ needs before their own, while also maintaining fair and equal treatment across their entire book of clients.
Disclosing conflicts of interest is also a critical aspect of maintaining transparency and fulfilling the Duty of Loyalty for financial advisers. A conflict of interest occurs when an adviser’s personal or financial interests could potentially influence their advice, recommendations or actions on behalf of a client.
Specifically, advisers must provide disclosures that are “clear and detailed enough for a client to make a reasonably informed decision to consent to such conflicts and practices or reject them.”
Fiduciaries have a ripe opportunity to attract new prospects and build trust with current clients – but they also must stay on track with fiduciary responsibilities, consistently putting client interest above their own.
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