With the recent ruling by the Department of Labor (DOL), there is more focus on the importance of being a fiduciary. But…
What does a fiduciary duty really mean for an independent investment advisory firm?
Basically, it means that the advisor owes its clients undivided loyalty. The duty of loyalty is typically met by a well-defined conflict of interest policy that clearly articulates a process for dealing with conflicts of interest. A few points included in an advisory firm’s conflict of interest policy are:
- Act in a position of trust and fiduciary responsibility to clients and do nothing to violate that trust.
- Act with competence, use reasonable care, and exercise independent professional judgment.
- Exercise independence while making investment decisions for clients.
- Act in the best interest of a client by placing the client’s interests before the advisor’s interests.
On the last point, unlike our bank and brokerage friends, independent Registered Investment Advisory (RIA) firms not only have to make recommendations that are suitable but also in their client’s best interest. “Suitable” means asking the question: Is the investment appropriate given the risk tolerance of the institution or individual? “Best interest” means the investment must be in the best interest of the client without regard to the financial or other interests of the advisor or its firm.
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