This week, I’d like to talk about fiduciary duty. I will be borrowing liberally from an article written by Knut Rostad in the February 11, 2013 edition of Investment News. Mr. Rostad is the president of the Institute for the Fiduciary Standard, a nonprofit formed to advance fiduciary principles through research, advocacy and education.
By way of background, fiduciary law was established to mitigate the knowledge gap between expert providers of socially important services, such as law, finance and medicine, and consumers of those services. Mitigation is accomplished by legally requiring those experts to put the interests of the consumer first, ahead of their own interests.
According to the article written my Mr. Rostad, the following are the six core duties of a fiduciary:
- Serve in the client’s best interests – no divided loyalties
- Act in the utmost good faith – be honest, truthful and accurate
- Avoid conflicts of interest – maintain objectivity
- Disclose all material facts and conflicts – make clear, complete and timely disclosures of all material facts and disclosures
- Act prudently, with the care, skill and judgment of a professional – use best practices and update knowledge and expertise regularly
- Control investment expenses – ensure that all fees, costs and expenses passed to the investor are fair and reasonable
As an SEC-registered investment advisor, I’ve maintained a fiduciary standard in my practice since I formed my business almost 16 years ago. I spend a lot of time with each new client explaining what my being a fiduciary means to them, how that differs from a “sales” perspective, and how that impacts our relationship. I believe strongly that all investors should demand a fiduciary standard from their advisors as it helps to minimize potential conflicts and more closely align the interests of both parties. The next time you speak with your financial advisor, ask him if and how he holds himself to a fiduciary standard.