Why Your Investment Manager Needs Fiduciary Certification

A fiduciary is a person or entity with the legal responsibility for managing someone else's money. Fiduciary duties are ethical and legal, and fiduciaries are required to act in the best interests of their clients. Investment managers handle activities related to financial planning, investing, and managing a portfolio for their clients. Given the significant fiduciary responsibilities of investment managers, it is important to consider whether they should be certified. While not all investment advisors have a fiduciary education or duty, the focus on fiduciaries by regulatory bodies like the Securities and Exchange Commission has increased. Certifications like the Accredited Investment Fiduciary (AIF) demonstrate a commitment to fiduciary duties and help investment managers better position themselves to care for their clients' interests.

Fiduciary law is complex and hard to enforce

Fiduciary law is complex and challenging to enforce. While fiduciaries are legally and ethically bound to act in their client's best interests, it can be difficult to prove a breach of duty in court.

Fiduciaries are held to a high standard of care, and they must always act with the needs of the beneficiary in mind. They must ensure that no conflict of interest arises between themselves and the principal. However, proving that a fiduciary has acted in bad faith can be challenging. For example, if a financial advisor makes an investment decision that results in a loss for the client, it would be challenging to prove that the advisor acted maliciously or in the interest of another party.

The complexity of fiduciary law is further exacerbated by the fact that it can vary across different jurisdictions. For instance, in Australia, only negative fiduciary obligations are recognised, while in Canada, fiduciaries can be subject to both negative and positive obligations. This variation in fiduciary law across different legal systems adds to the complexity and challenges of enforcement.

Furthermore, the nature of the fiduciary relationship itself can be complex and nuanced. Fiduciary duties can arise in various business relationships, including between trustees and beneficiaries, corporate board members and shareholders, executors and legatees, and investment advisors and clients. Each of these relationships has its own unique dynamics and complexities, which can make enforcing fiduciary law more difficult.

Additionally, the duties of a fiduciary can sometimes conflict with one another, particularly in the case of real estate agents and lawyers. While fiduciaries are expected to serve the best interests of their clients, in some cases, they may need to balance competing interests, which can make it challenging to determine whether a breach of duty has occurred.

Overall, while fiduciary law is designed to protect the interests of beneficiaries, its complexity and the challenges associated with enforcement underscore the importance of individuals carefully vetting and monitoring the financial professionals they hire to manage their money.

Fiduciaries are not profit-guaranteeing

While fiduciaries are legally and ethically bound to act in their clients' best interests, they are not profit-guaranteeing. In fact, under industry rules, no financial advisor can guarantee that their client will profit from any investment.

Fiduciaries are not allowed to profit from their position, except in the form of reasonable fees for services rendered. This is to ensure that the fiduciary is motivated only by the best interests of their beneficiary.

For example, imagine you ask your financial advisor to shelter your portfolio from risk, even if it means sacrificing potential profit. The advisor puts some of the money into blue-chip stocks, which promptly crash in value. In this case, the advisor has not acted in bad faith, and no breach of fiduciary duty has occurred.

Therefore, while fiduciaries are held to a high standard of care, they are not responsible for guaranteeing profits or protecting against losses.

Fiduciaries are not always honest

While fiduciaries are ethically and legally bound to act in the best interests of their clients, it is important to remember that they are not always honest. Here are some reasons why:

Firstly, despite the stringent fiduciary standards, some individuals may still act as bad actors and violate the rules of fiduciary conduct. This means that even if a financial professional is legally required to act as a fiduciary, it is crucial to conduct thorough research and due diligence before hiring them to manage your money. Vetting and monitoring the activities of financial professionals are essential steps in protecting yourself and your assets.

Secondly, the complexity of fiduciary law can make it challenging to prove a breach of trust in court. While fiduciaries who breach their duty may face severe civil and criminal penalties, it is not always easy to establish malicious intent or self-interest in their actions. For example, if a financial advisor makes investment decisions that result in losses, it can be difficult to prove that they acted in bad faith or with intent to benefit themselves.

Thirdly, the presence of dual registration among financial professionals can create conflicts of interest. In the United States, many financial advisors are registered as both investment advisors and brokers. This allows them to switch between fiduciary and brokerage firm standards, potentially prioritizing their own interests over their clients' without explicit disclosure. As a result, individuals may unknowingly make investment decisions that benefit the advisor, such as earning higher commissions or bonuses.

Lastly, while fiduciaries are obligated to disclose and resolve conflicts of interest in favour of their clients, it is not always easy to identify such conflicts. Fiduciaries may have personal or professional dealings that influence their investment recommendations, and it is the client's responsibility to remain proactive and vigilant in these situations.

In conclusion, while fiduciaries are generally expected to uphold the highest standards of care and put their clients' interests first, it is important to recognize that dishonesty or conflicts of interest can still occur. Therefore, individuals should carefully select and monitor their financial professionals, staying informed about their practices and investment recommendations.

Fiduciary negligence and abuse

Fiduciary negligence can include straightforward negligence, gross negligence, or negligent misrepresentation. Straightforward negligence occurs when a fiduciary breaches their duty, resulting in individual injury. Gross negligence is a step above, involving a reckless violation of the duty of care. Negligent misrepresentation happens when decisions are made based on information that was prepared without reasonable care.

Fiduciaries, including investment managers, have a responsibility to act in the best interests of their clients and are held to a high standard of care. This includes a duty of loyalty, a duty of care, and a duty of prudence. However, it is important to note that not all financial professionals are fiduciaries, and those who are not held to a fiduciary standard may follow a less stringent code of conduct.

Fiduciary abuse, on the other hand, refers to the unethical or illegal use of power by a fiduciary to serve their self-interest. This can involve using the beneficiary's resources for personal gain or failing to achieve the best value for the beneficiary, such as through excessive trading that erodes the client's gains. In cases of fiduciary abuse, the offending party may be subject to criminal penalties and may be held liable in a court of law.

To prevent and address fiduciary negligence and abuse, it is crucial for both fiduciaries and their clients to understand their rights and responsibilities. Fiduciaries should proactively manage risks, maintain transparency, and resolve disputes through alternative methods such as mediation to mitigate potential issues. Clients, on the other hand, should remain proactive and vigilant, regularly reviewing their financial affairs and seeking legal assistance if they suspect any misconduct.

Fiduciary rules and regulations

Fiduciaries are persons or organisations that act on behalf of others and are legally and ethically bound to put their clients' interests ahead of their own. They are required to act in good faith and preserve the trust of their clients. Fiduciary duties appear in various business relationships, including between a trustee and a beneficiary, corporate board members and shareholders, and executors and legatees.

An investment fiduciary is anyone with legal responsibility for managing someone else's money, such as a member of the investment committee of a charity. Registered investment advisors and insurance agents have a fiduciary duty to their clients. They are legally bound to act in their clients' best interests and can be held liable if they breach their fiduciary duties.

Fiduciaries must also comply with specific rules and regulations. For example, in the United States, the Employee Retirement Income Security Act (ERISA) protects retirement plan assets by requiring that those with discretionary control over plan management or assets are subject to fiduciary responsibilities. Fiduciaries under ERISA must run the plan solely in the interest of participants and beneficiaries and must act prudently to minimise the risk of large losses. They must also avoid conflicts of interest and may be held personally liable for any losses or improper use of plan assets.

The Securities and Exchange Commission (SEC) has also implemented regulations that impact fiduciaries. For instance, broker-dealers, who were previously held to a less stringent suitability standard, now must adhere to the Regulation Best Interest (BI) standard. This regulation requires broker-dealers to act in the best interest of the retail customer and disclose any conflicts of interest. While this regulation raises the standard of conduct for broker-dealers, it does not impose a fiduciary duty.

Fiduciaries should be aware of the rules and regulations that apply to their specific situations and seek to comply with them to avoid legal consequences and provide the best service to their clients.

Frequently asked questions