When is a Fiduciary not a Fiduciary?

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Question: When is a fiduciary not a fiduciary? Answer: When the fiduciary is not acting with undivided loyalty, due care and prudence when advising clients on their investments.

You would think this truism would be self-evident to any investment professional who claims to be acting in a fiduciary capacity for his or her clients. But the results of a recent survey of brokers and RIAs indicates that many apply their own personal “fiduciary litmus test” when determining where these responsibilities start and end.

Findings from the Q1 2011 ByAllAccounts Survey incorporated responses from more than 250 financial professionals, among whom roughly half were RIAs and 30% were brokers. Nearly 85% defined themselves as either fee-based or fee-only advisors, and 10% said they were fully commission-based.

Defining the standard

There is a great deal of confusion among investment professionals about what it means to be a fiduciary. For the record, the 1940 Investment Advisors Act, which regulates the investment activities of all Registered Investment Advisors, defines the following as principles advisors must follow when serving in a fiduciary capacity:

  • Advisors must act in the best interests of their clients and provide investment advice that represents those best interests.
  • Advisors owe their undivided loyalty to their clients and must always act in good faith.
  • Advisors should not engage in any activity that conflicts with their clients’ interests or, at the very least, disclose the nature of these conflicts to their clients and minimize their potential impact.
  • Advisors must provide full and fair disclosure of all material facts related to any advice they offer their clients and prospects.
  • Advisors must seek the best price and execution for their clients’ securities transactions.
  • Advisors must fully document and communicate their portfolio management processes, trading practices, marketing strategies, and safeguards for protecting clients’ assets against loss and theft.

Brokers who serve clients in a fee-only investment advisory capacity are expected to conform to these standards as well.

According to the survey, 96% of all RIAs and 76% of all brokers believe they're acting in a fiduciary capacity for their clients. Yet many advisors’ own assessments of how they fulfill their fiduciary requirements demonstrate more of a commitment in spirit than in practice.

Read more articles by Jeffrey Briskin