Foremost among the duties of Registered Investment Advisors (RIA) is to act as a fiduciary.
In law and finance, the role of a fiduciary (aka fiduciary duty), whether an organization or individual, is to act on behalf and in the interests of others.
Fiduciaries are both legally and ethically obligated to advise and do what is best for their clients. There are real consequences and legal implications if a fiduciary fails or refuses to carry out this duty. A fiduciary who has been found to neglect their duties is held liable.
In this article, InvestmentNews tackles what a fiduciary is, what their duties are, and whether a fiduciary is worth it. Let’s get into it.
Fiduciaries are organizations or individuals that act in the best interest of their clients. Registered Investment Advisors (RIAs) count among the finance professionals that are bound by a fiduciary duty to their clients. Other finance professionals like broker-dealers do not have a fiduciary duty and are only bound to the suitability standard.
Other finance-related professions have a fiduciary duty to their clients, including:
Not all financial advisors are bound by fiduciary duty. The term “financial advisor” may sometimes be used as a catch-all term to describe someone who gives financial advice to clients.
Simple definition of fiduciary: A person or entity who is legally bound to manage the assets of a client or beneficiary.
Fiduciaries in the financial industry are held to a higher standard compared to their non-fiduciary counterparts. Their responsibilities include:
RIAs or similarly bound financial professionals are entrusted with someone else’s assets and must make decisions that benefit only them. This could mean not presenting financial products that pay commissions to the fiduciary or making sure their client always gets enough data to make informed decisions.
Some RIAs or fiduciary planners can take it a step further and advise their clients not to make any fear-based investment decisions, especially if the advisor thinks it’s in their best interests.
A fiduciary has important financial duties and must carry them out diligently. Some of these duties include:
This is an important aspect of a fiduciary duty, as mixing a fiduciary’s assets with clients’ assets can be regarded as theft.
There has been at least one high-profile case where this happened. A once-reputable young billionaire and founder of a cryptocurrency exchange along with its board members mixed their investors’ money with their own, then used it for their own purposes. This controversial case remains a stark reminder of what happens when a financial entity entrusted with client assets commits a fiduciary breach.
A fiduciary must never mix clients’ money or property with their own or anyone else’s. Even mistakenly mixing assets can mess up financial records, and puts fiduciaries in serious trouble with government agencies like the SEC.
Finally, it is also the fiduciary’s duty to maintain complete and orderly records detailing their clients’ holdings and relevant transactions. Fiduciaries can be held liable simply for not keeping records.
An important aspect of this duty is keeping clients’ data safe.
Fiduciaries, RIAs in particular, often get paid in the form of fees. RIAs or similar fiduciaries in the financial space cannot receive commissions. They are legally bound not to recommend financial products from companies that will pay them a commission.
Fiduciaries cannot make money by selling securities to their clients that they will earn money from. That is a fiduciary breach which is not only unethical but punishable by law.
If the fiduciary financial planner is an RIA, they typically charge fees equal to about 1% of the value of AUM. RIA firms that use robo-advisors — algorithm-based investing models — can charge a modest monthly fee or an asset-based fee that ranges from about 0.25% and 0.75% of the AUM.
A fiduciary’s fees can be paid in these ways:
Some financial advisors who are not RIAs may have some overlaps with a fiduciary. Here’s a quick comparison:
| Feature | Financial Advisor | Fiduciary |
| Scope or Area of Practice | Fiduciary duty does not extend to all advisors; mostly concerned with managing clients’ wealth | Fiduciary duty crosses into other professions which may or may not involve financial decisions |
| Standard of Care | Held only to the suitability standard; investments need only fit clients’ standards or financial circumstances | Held to the fiduciary standard; must prioritize clients’ interests over and above their own |
| Cost of Services | Paid a flat fee, commissions, hourly rate or percentage of AUM yearly | Can be fee-only to minimize risk of conflict of interest |
These are two distinct standards applied to different finance professionals. The fiduciary standard demands that RIAs and other similar advisors only take actions or make investment recommendations in the best interest of their clients.
Meanwhile, the suitability standard only requires non-fiduciary planners to recommend financial products that fit their clients’ financial goals, time horizon, budget and risk appetite. If a client hires a financial planner who isn’t held to the fiduciary standard, there are a few implications.
Foremost of this is a possible conflict of interest. A financial advisor not bound by any fiduciary standard can recommend products that will allow them to make money out of their own clients via commissions, for example.
In 2020, the Securities and Exchange Commission started requiring stockbrokers and investment advisors to apply what they called the “best interest standard”. This is not as strict as the fiduciary standard and cannot guarantee any duty of loyalty from the non-fiduciary planner or advisor.
Fiduciary planners can have their own biases as to which investments would be in the “best interest” of their clients. This presenter suggests getting a second opinion from another fiduciary planner. Watch the video to know why.
Fiduciary relationships are not exclusive to the financial industry. Anyone who has consulted a lawyer, doctor, or bought company stock has entered a form of fiduciary relationship.
Here are some examples:
The agreement between a lawyer and their client is probably one of the most common fiduciary relationships. It is also one of the most restrictive – no less than the US Supreme Court said that lawyers must have the highest level of trust and confidence with their clients.
Lawyers must act with the highest standards of fairness, loyalty, and care while still within the law's boundaries. Lawyers can also be sued for fiduciary breaches that they may have committed with their clients. When such a breach occurs, lawyers are answerable to the court.
The fiduciary duty between doctor and patient is outlined in the Hippocratic Oath. Doctors should work and act in their patients’ best interest, which means:
As with other fiduciary relationships, trust and transparency are also essential in the doctor-patient relationship.
The fiduciary duty may be required of a stockholder who holds a majority interest in a company or has a high degree of control over its business activities. In this instance, the fiduciary duty lies with the majority stockholders to act with the interests of the minority shareholders in mind.
Should they make decisions that prejudice the interests of minority shareholders, the controlling shareholders, board of directors and corporate officers can be charged with breach of fiduciary duty.
A trustee-beneficiary relationship involves placing assets in a trust (an example is a revocable living trust). The creator of the trust appoints a trustee to administer the assets.
The trustee can be an individual, a bank or a law firm. Whomever or whichever the trustee, the grantor entrusts them with acting in the best interest of the beneficiaries.
A fiduciary can be held liable for a breach of their fiduciary duty to their clients. In the financial industry, if a fiduciary fails to fulfill their duties, they can be reported to the SEC, FINRA, or both institutions.
Holding a fiduciary accountable for a breach is no simple matter. The aggrieved parties must hire an attorney and establish that there was indeed a fiduciary breach, and that it caused the clients’ harm.
In a landmark case, employees of a company hired a financial adviser that mismanaged their 401k funds in 1999. The courts decided in favor of the plaintiffs in 2017. The company that hired the financial adviser who committed the breach ended up paying millions of dollars in damages to its employees. A fiduciary breach may take years to resolve, but it can be expensive and does not go unnoticed or unpunished.
Investors who want excellent financial planning with a sound estate plan or retirement plan should consider hiring and consulting a fiduciary planner or RIA whenever possible. This is especially true for beginning investors still learning the ropes.
A fiduciary’s profession demands that they maintain a responsibility to act in good faith. Fiduciary planners put their client’s best interests at the forefront of their actions.
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