Many investment advisors tout that they are “fiduciaries” to their customers, but many customers may not understand exactly what that means with regard to how their advisor must act in their relationship. This page discusses the fiduciary duties of Registered Investment Advisors which are regulated under a separate scheme from FINRA advisors.
The U.S. Securities and Exchange Commission (SEC) issued a report/guidance dated July 12, 2019 from the Code of Federal Regulations, 17 CFR 276, titled “Commission Interpretation Regarding Standard of Conduct for Investment Advisers.” This guidance details and clarifies the duties of Registered Investment Advisors and their Investment Advisor Representatives when they act as fiduciaries with respect to their customers.
First, the SEC Interpretation clearly states at page 2 that under federal law an investment adviser is a fiduciary, citing the federal Investment Advisers Act, 15 U.S.C. 80b, and Securities and Exchange Commission v. Capital Gains Research Bureau, Inc, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963).
The SEC then details the standards of conduct and duties which registered investment advisors owe to their customers. Examples are as follows:
- pp. 7-8: “An investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This fiduciary duty requires an adviser “to adopt the principal’s goals, objectives, or ends. This means the adviser must, at all times, serve the best interest of its client and not subordinate its client’s interest to its own.”
- p. 10: “… the obligations of an adviser providing comprehensive, discretionary advice in an ongoing relationship with a retail client (e.g., monitoring and periodically adjusting a portfolio of equity and fixed income investments with limited restrictions on allocation) will be significantly different from the obligations of an adviser to a registered investment company or private fund where the contract defines the scope of the adviser’s services and limitations on its authority with substantial specificity…”
- pp. 10-11: “…an adviser’s federal fiduciary duty may not be waived, though it will apply in a manner that reflects the agreed-upon scope of the relationship. A contract provision purporting to waive the adviser’s federal fiduciary duty generally, such as (i) a statement that the adviser will not act as a fiduciary, (ii) a blanket waiver of all conflicts of interest, or (iii) a waiver of any specific obligation under the Advisers Act, would be inconsistent with the Advisers Act, regardless of the sophistication of the client.”
- pp. 12-13: “The duty of care includes a duty to provide investment advice that is in the best interest of the client, including a duty to provide advice that is suitable for the client. In order to provide such advice, an adviser must have a reasonable understanding of the client’s objectives. The basis for such a reasonable understanding generally would include, for retail clients, an understanding of the investment profile… an adviser undertaking to formulate a comprehensive financial plan for a retail client would generally need to obtain a range of personal and financial information about the client such as current income, investments, assets and debts, marital status, tax status, insurance policies, and financial goals.”
- pp. 20-21: “An investment adviser’s duty of care also encompasses the duty to provide advice and monitoring at a frequency that is in the best interest of the client, taking into account the scope of the agreed relationship. For example, when the adviser has an ongoing relationship with a client and is compensated with a periodic asset-based fee, the adviser’s duty to provide advice and monitoring will be relatively extensive as is consistent with the nature of the relationship.”
- pp. 21-22: “To meet its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship.”
Virginia Securities Regulations also explicitly mandate a fiduciary duty for investment advisers at 21 VAC 5-80-200(A): “An investment advisor or federal covered advisor is a fiduciary and has a duty to act primarily for the benefit of his clients.” Section B of the regulation further applies this duty to investment adviser representatives.
Investment advisors may breach their fiduciary duties in many ways, including giving unsuitable advice, failing to disclose conflicts of interest, and failing to live up to their duty of care through negligent or wrongful activities that result in damages and losses by their customers. Please contact Scott Greco for a free securities fraud attorney consultation if you believe your advisor may have wronged you through breaches of their duties.