The Fiduciary Standard of Care
According to Webster’s, a fiduciary is “one who holds something in trust for
another….a person who stands in special relation of trust, confidence or
responsibility in his obligation to others.” Typically, fiduciary status is determined
by a person who:
According to the Committee for Fiduciary Standard, the Five Core Principles of a
fiduciary are:
Anyone who offers financial advice to clients should be a fiduciary. Surprisingly
(and generally unbeknown to clients), the great majority of people who call
themselves financial advisors are not fiduciaries. People who work at the major
brokerage houses (Merrill Lynch, Morgan Stanley) reject the fiduciary standard.
Brokerages firms are required to meet only the “suitability” standard. This is a
much lower standard of care. According to the NASD: When your broker
recommends that you buy or sell a particular security, your broker must have a
reasonable basis for believing that the recommendation is suitable for you.
Suitability is a substantially lower standard than fiduciary requirements. For
example, a broker operating under suitability requirements:
Certainly there are many good brokers out there who do more than the minimum.
But there really is no comparison to the two standards of care that exist in the
investment management world. Based on the suitability standards, the message is
clear: caveat emptor (buyer beware).
another….a person who stands in special relation of trust, confidence or
responsibility in his obligation to others.” Typically, fiduciary status is determined
by a person who:
- exercises discretionary control over the assets, and/or
- acts in a professional capacity of trust and renders comprehensive and
According to the Committee for Fiduciary Standard, the Five Core Principles of a
fiduciary are:
- Put the client's best interest first.
- Act with prudence: that is with the skill, care, diligence, and good judgement
of a professional. - Do not mislead clients; provide conspicuous, full and fair disclosure of all
important facts. - Avoid conflicts of interest.
- Fully disclose and fairly manage, in the clients favor, unavoidable conflicts.
Anyone who offers financial advice to clients should be a fiduciary. Surprisingly
(and generally unbeknown to clients), the great majority of people who call
themselves financial advisors are not fiduciaries. People who work at the major
brokerage houses (Merrill Lynch, Morgan Stanley) reject the fiduciary standard.
Brokerages firms are required to meet only the “suitability” standard. This is a
much lower standard of care. According to the NASD: When your broker
recommends that you buy or sell a particular security, your broker must have a
reasonable basis for believing that the recommendation is suitable for you.
Suitability is a substantially lower standard than fiduciary requirements. For
example, a broker operating under suitability requirements:
- Is not required to manage your investment costs.
- Is not required to provide ongoing monitoring of your portfolio.
- Is not required to choose an appropriate asset allocation strategy.
Certainly there are many good brokers out there who do more than the minimum.
But there really is no comparison to the two standards of care that exist in the
investment management world. Based on the suitability standards, the message is
clear: caveat emptor (buyer beware).
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