Fiduciary Standard
The fiduciary standard is the highest legal standard of care in financial services, requiring advisers to act in their clients' BEST interest at all times, not merely recommend "suitable" investments. It applies to Registered Investment Advisers (RIAs) under the Investment Advisers Act of 1940.
Exam Tip
Fiduciary = BEST interest (highest standard). Suitability = suitable (lower). RIAs are ALWAYS fiduciaries. Reg BI enhanced broker-dealer standard but is NOT full fiduciary. Cannot be waived by contract.
What is the Fiduciary Standard?
The fiduciary standard is a legal and ethical obligation requiring financial professionals to put their clients' interests ahead of their own. It is the highest standard of care in financial services and applies primarily to Registered Investment Advisers (RIAs) registered with the SEC or state regulators.
Fiduciary Standard vs. Suitability Standard
| Aspect | Fiduciary Standard | Suitability Standard |
|---|---|---|
| Legal Requirement | Act in client's BEST interest | Recommend SUITABLE investments |
| Conflict of Interest | Must avoid or fully disclose ALL conflicts | Less stringent disclosure requirements |
| Compensation | Must disclose all fees; avoid conflicts | Can recommend products with higher commissions if suitable |
| Who It Applies To | RIAs, CFP professionals, trustees | Broker-dealers (historically) |
| Regulatory Source | Investment Advisers Act of 1940 | FINRA rules (now enhanced by Reg BI) |
| Standard Level | Highest standard of care | Lower standard (though improved by Reg BI) |
| Client Relationship | Ongoing duty of care and loyalty | May end at point of sale |
| Can Be Waived? | No - cannot be waived by contract | More flexibility |
Components of Fiduciary Duty
| Duty | Requirement |
|---|---|
| Duty of Care | Make informed, prudent recommendations based on thorough analysis |
| Duty of Loyalty | Put client's interests first; avoid or disclose conflicts |
| Duty of Good Faith | Act honestly and fairly |
| Duty of Disclosure | Reveal all material facts and conflicts of interest |
| Duty of Prudence | Exercise reasonable care and skill |
Who Must Follow the Fiduciary Standard?
| Professional | Fiduciary Status |
|---|---|
| Registered Investment Advisers (RIAs) | Always fiduciary |
| CFP Professionals | Always fiduciary (per CFP Board standards) |
| ERISA Plan Fiduciaries | Fiduciary for retirement plan assets |
| Trustees | Always fiduciary |
| Broker-Dealers | Subject to Reg BI (enhanced suitability, not full fiduciary) |
Regulation Best Interest (Reg BI)
In 2020, the SEC implemented Reg BI to enhance the broker-dealer standard:
| Feature | Reg BI Requirement |
|---|---|
| Disclosure | Must provide Form CRS (Customer Relationship Summary) |
| Care | Must act in retail customer's "best interest" |
| Conflicts | Must mitigate conflicts of interest |
| Compliance | Firms must establish policies and procedures |
Note: Reg BI raises the bar for broker-dealers but is NOT identical to the full fiduciary standard.
Practical Differences
| Scenario | Fiduciary Response | Suitability Response |
|---|---|---|
| Two funds meet client needs, one has higher adviser compensation | Must recommend lower-cost option if better for client | Could recommend either if both are suitable |
| Client asks about product adviser doesn't sell | Must discuss all options, even those without compensation | May focus only on products they can sell |
| Conflicts of interest | Must avoid or fully disclose and get informed consent | Less stringent disclosure required |
How to Identify a Fiduciary
| Question to Ask | Fiduciary Answer |
|---|---|
| "Are you a fiduciary at all times?" | Yes, always |
| "How are you compensated?" | Full transparency on all fees |
| "Do you receive commissions?" | RIAs typically fee-only or fee-based with full disclosure |
| "Are you registered with SEC/state as an RIA?" | Yes (check SEC IAPD database) |
Exam Alert
Key points for securities exams:
- Fiduciary = BEST interest (highest standard); Suitability = suitable interest (lower standard)
- RIAs are ALWAYS fiduciaries under the Investment Advisers Act of 1940
- Broker-dealers follow Reg BI (2020) - enhanced but NOT full fiduciary standard
- Fiduciary duty cannot be waived by contract
- Two key duties: Duty of Care and Duty of Loyalty
- CFP professionals are fiduciaries per CFP Board standards
- ERISA fiduciaries apply to retirement plan management
Study This Term In
Related Terms
Fiduciary
GeneralA fiduciary is a person or organization legally obligated to act in the best interest of another party, putting the client's interests ahead of their own.
Investment Adviser
GeneralAn investment adviser is a person or firm that provides advice about securities for compensation, regulated by the SEC (if managing $100M+) or state regulators, and held to a fiduciary standard.
Broker-Dealer
GeneralA broker-dealer is a financial firm that buys and sells securities for its customers (broker) and for its own account (dealer), regulated by FINRA and the SEC.