The Fiduciary Standard – It’s “Best Interests,” Not “Like Everyone Else”

During a recent deposition of an investment adviser, the adviser told me that was doing the exact same thing as everyone else in the  industry and asked me why I was “targeting” him. Not the first time I have heard this argument, nor probably the last time I will hear it.

I do sue investment advisers and stockbrokers on behalf of investor. I also serve as a consultant to RIA firms and show them how to “bulletproof” their practices. This blog is part of my educational efforts for RIA firms.

Fiduciary law is derived from both trust and agency law. The core principle is that a fiduciary must always show undivided loyalty, must always act in the customer’s/client’s “best interests.” Just remember this statement and you should be OK:

Fiduciary law defines loyalty in terms of the customer’s/client’s “best interests,” not in terms of what the financial services industry or other investment professionals are doing.

I remember the old saying, “well, would you jump off the Golden Gate bridge just because everyone else did?” Same concept. I’ll let you in on a little secret – the law is not going to change anytime soon. Focus on a customer’s/client’s best interests, not what everyone else is doing.

What securities attorneys now realize is that through the use of forensic analysis and tools such my metric, the Active Management Value Ratio™, it is becoming much easier to document both fiduciary prudence and the lack thereof. Therefo0re, it is incumbent on prudent investment advisers and financial advisers to learn and use the same tools and processes in order to protect their practices and better serve their clients.

Stockbrokers who think they are never fiduciaries and can do whatever they want might be interested in the following quotes:

The suitability requirement that a broker make only those recommendations that are consistent with the customer’s best interests prohibits a broker from placing his or her interests ahead of the customer’s interests. (from “FINRA Regulatory Notice 12-25)

As we have frequently pointed out, a broker’s recommendations must be consistent with his customer’s best interests. (Wendell D. Belden enforcement decision)

In interpreting the suitability rule, we have stated that a [broker’s] ‘recommendations must be consistent with his customer’s best interests. (Scott Epstein enforcement decision)

Brokers should also be aware that the courts are showing an increased willingness to impose a fiduciary standard on brokers when customers lack the knowledge and/or experience to independently evaluate their broker’s recommendations. I would suggest that this could potentially cover a third to a half of brokerage accounts. Therefore, both investment advisers and stockbrokers wo0uld do well to remember the following:

Fiduciary law defines loyalty in terms of the customer’s/client’s “best interests,” not in terms of what the financial services industry or other investment professionals are doing.



About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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