A big part of being a Registered Investment Advisor, or RIA, is ensuring that your business practices, technology solutions, communications with clients, and investment strategies comply with the myriad regulations that govern the financial services industry. Of those rules and regulations, none is more important than the fiduciary duty rule.
Your fiduciary obligations are likely to affect everything you do as an RIA. However, in a world of ever-changing regulations, it can be difficult to stay compliant. Even veteran advisors can have difficulty navigating the rules of the road. Understanding more about your fiduciary duty can help you serve your clients more effectively while ensuring that you meet your ethical obligations.
What Is A Fiduciary?
Generally speaking, a fiduciary is a person or entity that owes a duty to another. That duty includes the fiduciary’s obligation to put the other party’s interests ahead of the fiduciary’s interests.
The fiduciary rule for advisors traces its origins back to the Investment Advisers Act of 1940. As described by the Securities and Exchange Commission, or SEC, this Act required that “firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.” Under those regulations, and the case law interpreting them, advisors have been deemed to be fiduciaries to their clients, owing those clients both a duty of care and a duty of loyalty.
The application of the fiduciary rule is “principles based,” meaning that it is based on interpretation of common law principles, and is not defined by a specific SEC regulation. The SEC has, however, issued interpretive guidance outlining the advisor’s fiduciary duty.
The Fiduciary’s Duty Of Care
An investment advisor’s duty of care includes the duty to provide advice that is in the client’s best interest, the duty to seek best execution, and the duty to monitor the account throughout the relationship.
As interpreted by the SEC, “the duty of care requires an investment adviser to provide investment advice in the best interest of its client, based on the client’s objectives.” The advisor must make reasonable inquiry into the client’s objectives, considering “the client’s financial situation, level of financial sophistication, investment experience, and financial goals.” The advisor also must be of the reasonable belief that the investment is in the client’s best interest, including investigating the investment to ensure that it is not based on inaccurate or incomplete information. The advisor also owes a duty to ensure that execution of any transactions is undertaken so as to minimize the client’s cost and maximize returns. Finally, the advisor has an ongoing responsibility to provide advice and monitoring in accordance with the client’s best interest over the course of the relationship.
The Fiduciary Duty Of Loyalty
The duty of loyalty has been interpreted to mean that an advisor should be free of any conflicts that might undermine the ability to offer fair and impartial advice to a client. As the SEC has interpreted it, “under its duty of loyalty, an investment adviser must eliminate or make full and fair disclosure of all conflicts of interest which might incline an investment adviser — consciously or unconsciously—to render advice which is not disinterested such that a client can provide informed consent to the conflict.”
In practice, these requirements require disclosure of any potential conflicts. For those advisors dually registered as broker dealers, this takes the form of written disclosures regarding the the circumstances in which the advisor intends to act in a brokerage capacity and the circumstances in which the advisor will act in an advisory capacity. Any disclosures must be specific enough that a client can understand and make an informed decision whether to consent to a conflict. These determinations are made by the SEC on a case-by-case basis, considering all factors, including the sophistication of the client and the completeness of the advisor’s disclosure.
The disclosure itself takes the form of a brochure, required under Part 2A of Form ADV, which sets out minimum disclosure requirements for advisors.
Want to Keep the Conversation Going?
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Over the course of nearly 30 years, we have consulted on and closed thousands of professional placements for Advisors, nationwide, in most every major city throughout the United States, with client assets transferring exceeding $67 billion dollars. We have built deep relationships with the advisory world’s most sophisticated and notable firms — including Wall Street Brokerages, most Regionals, Boutiques, Banks, Independent Broker Dealers, RIAs and Custodians. Our broad knowledge of those firms and the deals that are currently being offered will ensure that you are being presented with the right firm choice, platform, and the offer which is best for you.
Confidentiality, professionalism, and respect are protocol to our practices and beliefs; we handle each and every step of the placement process with complete communication, keeping you informed while making the process smoother from beginning to end.
We are proud to always be considered as a great asset by our clients because of our proven expertise, many years of knowledge, and acute attention to detail. Financial Advisor Recruiting Services are not all created equal; we guarantee that the TG experience for clients and candidates is always world class.
We are based in Chicago, with a nationwide reach. Let us know you are interested by contacting us today. To get the conversation started, email info@terranagroup.com or give us a call at 312.655.8380 today.
