Fiduciary Responsibility

Fiduciary Responsibility

Big news within the investment industry: The Department of Labor is spearheading legislation that would require investment professionals to act in a fiduciary capacity with respect to any assets they manage. Currently, only advisors who manage ERISA retirement plans are required to act as fiduciaries.

Back up… What is a fiduciary?

Broadly speaking, a fiduciary is an individual or entity that is legally bound to act in the best interests of his or her client. The term is used in many different industries, and the definition varies slightly depending on the relationship between professional and client. 

How does it apply to financial services?

Currently, investment professionals abide by the “suitability standard,” which requires that recommendations to buy or sell an investment product must be suitable for the client’s objectives. However, oftentimes there are several products or strategies that could be deemed “suitable” to a client’s objectives, and an unscrupulous advisor is free to recommend  the most expensive choice, even if it comes with undue restrictions. The proposed fiduciary standard takes things a step further and requires that the advisor only recommend the most suitable option irrespective of his own best interests, i.e. how much he gets paid for recommending it. 

That sounds like a good thing. Why doesn’t everybody already do this?

Some do. Many parties believe that practicing the fiduciary standard is, as the kids say, a “no-brainer,” and groups including the CFA and CFP Boards already require their members to take a fiduciary oath (Peter carries both designations). However, some of the larger investment firms have resisted the shift.


First, being a fiduciary adds an additional layer of legal responsibility to do the right thing. Anyone who is found not doing the right thing can be held legally liable. Big companies don’t like lying down on the tracks of the legal freight train. Second, acting solely in the best interest of the client could potentially hurt revenues, as the best recommendation is often not the one that generates the largest commission. 

Where do we go from here?

That’s a great question. We’re not quite sure, but we believe the outcome will be positive. In an ongoing effort to make our business more transparent, pressures from both within the industry and without will push this regulation forward. That said, the regulatory toolbox is filled with blunt instruments, and regulatory bodies like the DoL and Congress have historically been a bit overzealous in enacting new rules and regulations surrounding how the financial services industry conducts business (even if the intention is noble). If and when they do institute fiduciary legislation, it will be important for regulators to retain the spirit of the rule without imposing unnecessary layers of red tape.

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