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Who is Your Fiduciary?

Disclaimer: This article contains information that was factual and accurate as of the original published date listed on the article. Investors may find some or all of the content of this article beneficial but should be aware that some or all of the information may no longer be accurate. The information and/or data in this article should be verified prior to relying on it when making investment decisions. If you have any questions regarding the information contained in this article please call IFA at 888-643-3133.

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A fiduciary duty is a legal duty to act solely in another party's interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals' express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries' other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.

Examples of fiduciary relationships include those between Registered Investment Advisors and their clients, 3(38) Investment Managers for ERISA 401k Plans, lawyers and their client, physicians and their patients, CPAs and their clients, guardians and their wards, and directors and their shareholders. But, not stock brokers.

"A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence."

Investment Advisers Are Fiduciaries

The court of chancery, which governed fiduciary relations prior to the Judicature Acts

The language below is directed to RIAs and taken from the SEC's website

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 impartiality 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 your clients (under Section 206 of the Advisers Act).

Broker-dealers Are Not Fiduciaries

Standard broker-dealers are not fiduciaries for their clients. But some brokers have started offering fee-based services, but still maintained potential conflict of interests. This created confusion among clients, so the SEC passed regulations that required them to clarify their non-fiduciary status. This document does a very good job explaining this very important distinction.

The rule required this statement in their advertisements and agreements:

"When we act as your broker-dealer, we do not enter into a fiduciary relationship with you.  Absent special circumstance, we are not held to the same legal standards that apply when providing investment advisory services." 

Here is an excerpt from another broker contract:

"However, we do not have a fiduciary or advisory relationship with you, and our obligations to disclose information regarding our business, conflicts between our interests and yours, and other matters are more limited than if we had fiduciary or advisory duties to you."

For examples of this language on Broker-Dealer agreements, please see: - Hidden Fees Pose a Fiduciary Barrier - Show 28-2