The Fiduciary Standard

Brent O’Mara holds the Certified Fund Specialist and Accredited Investment Fiduciary designations, and the entries in this subject explain the word at the heart of the second of them: what a fiduciary is, where the duty comes from, and how it differs from the lesser standards that have applied to other kinds of financial advice.

The definition is older than any financial regulation. The Consumer Financial Protection Bureau describes a fiduciary as someone who manages money or property for someone else and must, by law, do so for that person’s benefit, with four basic duties: act in the person’s best interest, manage the property carefully, keep it separate from one’s own, and keep good records.¹ Cornell’s Legal Information Institute traces the obligation to any relationship in which one party places trust and confidence in another who accepts responsibility to act for them, as between agents and principals or trustees and beneficiaries, and sorts the resulting duties into obedience, loyalty and care.² For workplace retirement plans the rule is written into statute: the Department of Labor explains that under ERISA anyone with discretion over a plan’s assets, or who gives a plan investment advice for compensation, must run it solely in the interest of participants, act prudently, diversify to reduce the risk of large losses and avoid conflicts of interest.³

The contrast that matters for investors is between that duty and suitability. A Wall Street Journal glossary put it in one line: a suitable investment is not necessarily in the client’s best interest, and an adviser may be nothing more than a salesman.⁴ The Los Angeles Times reported in 2010 on the fight over whether the financial reform bill would hold every adviser to a fiduciary standard, which the House version required and the Senate version replaced with a study.⁶ A decade later The New York Times described research from Harvard Business School finding that the mere threat of a stricter Labor Department rule had changed industry behavior and lowered investor costs, even though the rule was never enforced.⁵ How those duties apply to a particular trust, plan or account depends on personal circumstances, which is why the question goes to qualified legal and financial advisers.

The entries in this subject are The Investment Advisers Act of 1940, Suitability Versus Fiduciary Duty, Regulation Best Interest and Form CRS, How Financial Advisors Are Paid, ERISA and Retirement Plan Fiduciaries and The Duty of Loyalty in Trust Law.