Are you a fiduciary? It’s a question advisors are hearing from clients—and asking themselves—with more frequency. In recent years, the topic of what it means to be a fiduciary has moved to the forefront, with the DOL fiduciary rule (vacated in 2018 with new proposals re-emerging in 2020), Regulation Best Interest (Reg BI), and Form CRS piquing interest and raising awareness among investors. Clients want advisors who put their interests first. And the savvier ones are vetting and choosing advisors based on a fiduciary standard of conduct—with the expectation of greater transparency and visibility into the services provided to them. Here’s a look at some of the securities regulations and guidelines, as well as the scenarios they apply to. This will help you answer the question of whether you’re a fiduciary.
With the volume of regulations, determining what it means to be a fiduciary—and whether you are one—isn’t as straightforward as you’d expect. Each law comes with specific conditions:
Investment Advisers Act of 1940. Under this federal requirement, if you’re acting in an investment adviser representative (IAR) capacity, then you’re a fiduciary. This strict standard of fiduciary duty has two components—a duty of care and a duty of loyalty. The duty of care requires you to provide impartial and objective advice that’s in the best interests of clients based on their specific circumstances and investment objectives. The duty of loyalty component requires that you not place your interests ahead of a client’s and provide full and fair disclosure of all material facts related to the advisory relationship, including fees and conflicts of interest. Generally, when you’re acting as an IAR under a state-registered investment adviser, you’re also a fiduciary.
ERISA. Depending on the services you provide a retirement plan sponsor or a plan’s participants, you may be considered a fiduciary. The fiduciary standard under ERISA is considered the highest fiduciary standard under law, with five separate duties that apply:
A duty of loyalty to act solely in the interest of plan participants
The duty to act with the prudence of an expert
The duty to diversify investments
The duty to ensure reasonable plan fees and expenses
The duty to comply with the terms of the plan’s governing documents
Reg BI. Reg BI established a new best-interest standard of conduct that affects how advisors and broker/dealers do business. Reg BI didn’t create a fiduciary standard of conduct, but the general obligation states that advisors must act in the best interest of a retail customer without putting their interests ahead of the customer’s. This standard of conduct, including the underlying Care and Disclosures Obligations, enhanced the factors to consider for recommendations, expanded recommendations to include account type, and increased the information provided to customers regarding the services you offer.
States Have Rules, Too. What it means to be a fiduciary can differ at the state level as well. Some states have proposed a fiduciary standard for broker/dealers and their advisors surrounding brokerage transactions. For example, in March 2020, the Massachusetts Securities Division adopted the Massachusetts fiduciary rule, which imposes a fiduciary standard of conduct when providing a recommendation or advice to Massachusetts residents. You have a duty to inquire about the customer’s needs and information at the time of the recommendation and to address or disclose conflicts. And as an IAR, the rule doesn’t affect your existing fiduciary duties and has several exclusions.
Being the Standard Bearer
It comes down to this: the standard of conduct you are held to generally depends on the capacity you serve, the services you provide, and the way you’re compensated. So, if your practice provides advisory services—such as portfolio management, consulting, and financial planning—for an asset management fee or under a consulting agreement, then you’re likely a fiduciary.
Keep in mind, though, that the fiduciary standard of conduct that applies will differ by scenario. For example, if you provide recommendations for a 529 plan and earn a commission, the standard of care under Reg BI applies. If you provide investment advice specific to retirement plan sponsors in the capacity of a 3(21) fiduciary, however, then the Advisers Act and ERISA apply.
The bottom line is whether you’re acting in a fiduciary capacity—open and clear communication with your clients and prospects is essential to ensure that they understand your role. Resources like Form CRS can be a good jumping-off point to help you discuss the services you offer, how you are compensated, and the standard of conduct to which you are held.
This material is for educational purposes only and is not intended to provide specific advice.