Fidelity Investment Advisors: Are They True Fiduciaries?

When it comes to managing your finances, it's crucial to understand the role of investment advisors and whether they act as fiduciaries. A fiduciary is legally required to provide advice solely in their client's best interests and recommend products that align with their financial goals and risk tolerance. So, are Fidelity Investment Advisors fiduciaries? The answer is nuanced. Fidelity Investments serves as a fiduciary when providing investment advisory services. In this context, they are legally obligated to prioritize their clients' interests, disclose fees and potential conflicts of interest, and ensure that their advice aligns with the client's investment objectives. However, when Fidelity acts as a broker-dealer, they are not legally required to act as a fiduciary. In this role, they execute trades on behalf of their clients but do not have the same fiduciary responsibilities. It's essential to understand the capacity in which Fidelity is serving you to know your level of protection under the law.

Investment advisors vs brokers

Investment advisors and brokers are distinct roles in financial services, with different responsibilities, regulations, qualifications and payment structures.

Responsibilities

Investment advisors provide advice and guidance on investments and investment strategies. They are often also involved in wealth management, helping clients with tax, estate and mortgage planning.

Brokers, on the other hand, are responsible for executing trades and buying and selling assets for clients. However, with the advent of online trading, the role of the broker has expanded to include more advisory services, such as personalised investment management.

Regulations

Investment advisors are regulated by the Securities and Exchange Commission (SEC) and/or a state regulatory body. They are held to a higher legal standard than brokers and must adhere to the Investment Advisers Act of 1940, which includes fiduciary duties in regards to their clients' accounts.

Brokers are regulated by the Financial Industry Regulatory Authority (FINRA) and the SEC. They must register with both bodies.

Qualifications

Investment advisors must pass the Series 65 exam before they can offer financial advice.

Brokers are required to pass the Series 7 exam, also known as the General Securities Representative Exam, to obtain their trading license.

Payment Structures

Investment advisors are typically fee-only advisors, charging a flat fee, an hourly fee, or a percentage of the assets under management.

Brokers are paid commissions for executing trades and buying and selling assets for clients.

Fidelity Advisors

Fidelity advisors are not fiduciaries. They are held to the ''best interest'' standard, which means that while they cannot sell products that do not match a client's goals or risk tolerance, they can be incentivised to sell products that pay them a higher commission.

Suitability standard

A suitable investment is defined by FINRA as one that fits the level of risk that an investor is willing and able to take on, as measured by their personal financial circumstances. This means that, in addition to having a risk-friendly investment profile, an investor must also be in a financial position to take on certain risks and understand the nature of those risks and their possible consequences.

FINRA Rule 2111 lists three main suitability obligations:

• Reasonable-basis suitability: A broker must have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
• Customer-specific suitability: A broker must have a reasonable basis to believe, based on a particular customer's investment profile, that the recommendation is suitable for that customer.
• Quantitative suitability: A broker with control over a customer's account must have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, is not excessive and unsuitable when taken together in light of the customer's investment profile.

Suitability is a fluid concept, changing with an investor's life circumstances. For example, the suitability of investments for a 30-year-old is very different from that of a 60-year-old. Life events such as marriage, having children, salary changes, or job loss should prompt a reconsideration of suitability.

Fiduciary responsibilities

A fiduciary is someone who manages money or property for someone else. They are in a position of trust and must act in the best interest of the other person. This means that, by law, they must manage the person's money and property for the benefit of that person, not themselves.

• Acting solely in the interest of the participants and their beneficiaries.
• Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan.
• Carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters.
• Following the plan documents.
• Diversifying plan investments.

In the context of investment advisors at Fidelity, it is important to note that they are not fiduciaries. They are only held to the best interest standard, which is less strict than the fiduciary standard. This means that they can receive commissions or extra payments for recommending certain investments over others, as long as those investments align with the client's goals and risk tolerance.

Conflicts of interest

Fidelity's brokers may also be licensed to sell insurance and annuities, or offer referrals to non-affiliated advisors, and in these cases, they are also acting in a broker-dealer capacity and are not required to uphold a fiduciary standard. This creates an incentive for brokers to recommend products that benefit them financially, even if other options are available that may better suit the client's needs.

For example, FBS (Fidelity Brokerage Services) earns more on certain third-party funds and ETFs through fees and other compensation, creating an incentive to recommend these products over others. Similarly, FBS can earn more when executing "principal trades" (trades with their own accounts) than when executing "agency trades" (trades on the open market for a client's account).

While not acting as fiduciaries, broker-dealers are still held to a suitability standard, meaning they need to have a suitable belief that an investment or trade is suitable for their customers. However, this does not eliminate the potential for conflicts of interest, as they can still recommend products that benefit them financially as long as they are deemed suitable for the client.

To address these potential conflicts of interest, Fidelity is required to disclose any such instances and adhere to applicable state and federal securities laws.

Regulatory standards

Fidelity Investments is a fiduciary when it works in an investment adviser capacity. Under the Advisers Act of 1940, RIAs (Registered Investment Advisers) are required to operate as fiduciaries when working with clients. When you enter an Investment Advisory Services relationship with Fidelity, the firm has a legal obligation to act as a fiduciary on your behalf. In this capacity, you will be working directly with human investment advisors who will aim to provide guidance to help you meet your investment goals.

Fidelity's fiduciary responsibilities include:

• Putting your interests ahead of their own
• Disclosing all fees and costs associated with their services
• Disclosing any potential conflicts of interest
• Adhering to applicable state and federal securities laws
• Ensuring that investment advisory services align with your specific investment objectives, needs, and circumstances

Fidelity is not a fiduciary when it is operating as a broker-dealer. When Fidelity serves you in a broker-dealer capacity, the organisation is not required to act as a fiduciary. As a broker-dealer, Fidelity Brokerage Services, LLC's main goal is to accept and complete transactions within your Fidelity brokerage account based on your direction. In other words, you have full control of your brokerage account, and Fidelity's primary role is to execute the trades you choose to make.

Fidelity Brokerage Services is registered with the SEC and is a member of the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange (NYSE), and the Securities Investor Protection Corporation (SIPC). The brokerage arm of Fidelity Investments must also abide by applicable securities laws and regulatory standards. Such regulations require broker-dealers to follow standards including:

• Executing trades with diligence and aiming to offer the best execution in light of market conditions
• Having a reasonable belief that securities specifically presented to you are suitable based on your financial situation, risk tolerance, and other facts you disclose to the firm
• Treating you fairly and upholding high standards of honesty and integrity

Frequently asked questions