WHAT EXACTLY IS A FIDUCIARY ANYWAY? INVESTMENT ADVISER REQUIREMENTS

Registered investment advisers, either registered with the Securities and Exchange Commission or with a State, are “fiduciaries” to their advisory clients. With the recent talk about fiduciary requirements being extended to agents or financial professionals offering advise on retirement plans, what exactly does being a fiduciary mean in the context of a registered investment adviser? It means that there is a fundamental obligation to act in the best interests of clients and to provide investment advice in a client’s best interests. Registered investment advisers owe their clients a duty of undivided loyalty and utmost good faith.

Having a fiduciary duty is a higher burden than requiring only suitability of an investment where the investment professional offering services would only have to determine whether the investment is suitable for a client, not whether the product being offered to the client is in the client’s best interest.

Registered investment advisers are not to engage in any activity in conflict with the interest of any client, and are to take steps reasonably necessary to fulfill their obligations. They must employ reasonable care to avoid misleading clients and must provide full and fair disclosure of all material facts to their clients and prospective clients.

Generally, facts are “material” if a reasonable investor would consider them to be important. Investment advisers must eliminate, or at least disclose, all conflicts of interest that might incline them — consciously or unconsciously — to render advice that is not disinterested. If they do not avoid a conflict of interest that could impact the impartiality of their advice, they must make full and frank disclosure of the conflict. Additionally, an adviser cannot use a client’s assets for their own benefit or for the benefit of other clients, without the client’s consent.

Departing from this fiduciary standard may constitute “fraud” upon the clients under Section 206 of the Advisers Act, which says in part that fraud is,

(1) to employ any device, scheme, or artifice to defraud any client or prospective client;
(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
(3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; or
(4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.

Although the role of being a fiduciary may be a burden, there is the flip side that a client knows that the adviser is acting in the client’s best interest, causing less doubt of the motive of the registered investment adviser in offering advise to the client.