As a registered Investment Advisor Representative of Portfolio Resources Advisor Group, Inc., I am bound to the Investment Advisers Act of 1940 and its interpretations, as well as to the company’s code of ethics and compliance procedures. In addition, as a CFA charter holder and a CFP® professional, I must follow the codes of ethics and standards of conduct of both institutions.
Even though the concept of fiduciary duty is not explicit in the Act, it has been referred to by the SEC in a series of cases and statements. The CFA Standards of Conduct include wording about independence and objectivity, as well as the duties of loyalty and care. The CFP® Standards of Conduct explicitly refer to Fiduciary Duty, being further refined as the duty of loyalty, duty of care, and the duty to follow client instructions.
As the term fiduciary duty is one that some of you may not be familiar with, I asked the AI engine in Microsoft Bing to search for a definition and I found it to be very clear and comprehensive:
“A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests. A fiduciary may be responsible for the general well-being of another (e.g., a child’s legal guardian), but the task often involves finances—for example, managing the assets of another person or a group of people. (1)
Fiduciaries have a bond of trust with clients and must avoid conflicts of interest. Fiduciary relationships exist across many types of professions. For example, board members may have certain fiduciary duties to their companies, trustees owe fiduciary duties to their beneficiaries, and retirement plan administrators typically have a fiduciary duty to their company’s employees. (2)
In the world of finance, only certain types of financial advisors, such as certified financial planners and registered investment advisors, are bound by fiduciary duties. Financial advisors who have fiduciary duties must only recommend investments and other financial planning products that are the best fit for their clients. (2)”
Clients benefit from engaging a Financial Advisor that acts as a fiduciary because they obtain a level of loyalty (not subordinate clients’ interests to its own and eliminate or disclose all conflicts of interest), care (provide advice that is in the best interest of the client) and transparency that may not be found under other circumstances.
Sources: (1) Fiduciary Definition: Examples and Why They Are Important – Investopedia. https://www.investopedia.com/terms/f/fiduciary.asp. (2) What Is a Fiduciary? Meaning, Examples and Why They Matter. https://www.nerdwallet.com/article/investing/fiduciary