Fiduciary or Not? – What Does it Mean?

As financial advisors and stockbrokers try to re-cast themselves as “Financial Planners” or “Investment Advisors”, they should know that they may be held to a higher standard of care.

The SEC on its website warns newly-registered Investment Advisors as follows:

As an investment adviser, you are a “fiduciary” to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client, and you should take steps reasonably necessary to fulfill your obligations. You must employ reasonable care to avoid misleading clients and you must provide full and fair disclosure of all material facts to your clients and prospective clients. Generally, facts are “material” if a reasonable investor would consider them to be important. You must eliminate, or at least disclose, all conflicts of interest that might incline you – consciously or unconsciously – to render advice that is not disinterested. If you do not avoid a conflict of interest that could impact the impartially of your advice, you must make full and frank disclosure of the conflict. You cannot use your clients’ assets for your own benefit or the benefit of other clients, at least without client consent. Departure from this fiduciary standard may constitute “fraud” upon clients (under Section 206 of the Advisers Act).

I believe the spirit of the warning is clear; financial advice must be disinterested. This means at minimum that if an advisor recommends a product in which he is to obtain a commission, he must also disclose the lower cost alternatives to fulfill his duties of disclosure. As a fiduciary with the utmost duties of care and loyalty, this is the least the public should expect.

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