A plain-language explanation of the fiduciary standard, when it applies, and what investors should still verify.
By Jeff Herman
A fiduciary investment advisor is an investment professional who must act in a client’s best interest when providing advisory services within the scope of the relationship. In federal securities law, the regulated term is usually spelled investment adviser. Consumers often spell it advisor; the difference in spelling does not change the question that matters: what legal role is the professional performing for you?
What does fiduciary mean in investment advice?
The Securities and Exchange Commission describes an investment adviser’s fiduciary duty as a principles-based duty that applies across the advisory relationship. It includes duties of care and loyalty. The exact obligations depend on the services the client and adviser agree to, so the written agreement is part of the answer.
What do the duties of care and loyalty require?
The duty of care generally requires advice based on a reasonable understanding of the client’s objectives and circumstances. Depending on the engagement, it may also include ongoing monitoring or the pursuit of best execution for trades. The duty of loyalty requires the adviser not to put its own interests ahead of the client’s. Material conflicts must be addressed through full and fair disclosure so the client can provide informed consent, and in some circumstances a conflict may need to be mitigated or eliminated.
Is every financial advisor a fiduciary?
No title alone answers that question. A person using the title financial advisor may be an investment adviser representative, a broker, both, or neither. A professional who holds both registrations may act in an advisory capacity for one service and a brokerage capacity for another. Ask which capacity applies to the specific account and recommendation.
What does fiduciary status not guarantee?
Fiduciary status does not guarantee returns, prevent losses, or mean conflicts never exist. It also does not tell you the fee, investment approach, account minimum, or scope of monitoring. Those facts belong in the adviser’s Form ADV, Form CRS and client agreement.
Questions to ask a fiduciary investment advisor
- When will you act as a fiduciary? Ask for the answer in relation to the specific service and account.
- What is included? Clarify advice, portfolio management, financial planning, and ongoing monitoring.
- How are you paid? Request all advisory fees, commissions, product costs, and other compensation.
- What conflicts should I understand? Read the disclosures and ask how each material conflict is addressed.
