Sunday, March 2, 2014

Can Core Fiduciary Duties Be Waived? Not if You Understand the Nature of Trust

In the current debate as to whether to apply fiduciary standards to all those who provide advice to defined contribution accounts and IRAs, and upon brokers who provide personalized investment advice, SIFMA and FSI have called for a "new federal fiduciary standard." Yet, it is clear that what they tout is mere disclosure of conflicts, and casual disclosure at that.

Yet, the law usually dictates that the fiduciary duty of loyalty is a mandatory duty, not one which can be waived by a client. The logic is clear. For it is trust has been given, and received.

The fiduciary investment or financial advisor is either loyal or is not. The advisor cannot be more or less loyal, by seeking an agreement with the client to acquiesce to less loyalty. For which client, if knowledgeable, would ever accede to such a request that the duty of loyalty be abrogated.

The fiduciary, having acquired his or her status as such, is bound to an unlimited loyalty to her principal. While the scope of the engagement may vary to a degree, the duty of loyalty itself remains fundamentally the same. The investment or financial advisor must at all times act in the best interests of the client. Even when a non-avoidable conflict of interest arises, and such conflict is affirmatively disclosed in all respects and the client consents thereto, the fiduciary is still bound to act in a manner which is substantively fair to the client. For that is the nature of trust.

To understand the nature of trust, I invite you to watch this very short video:

To all those who seek to diminish the fiduciary standard, whether through statute, regulation, or inaction, I urge you to consider the importance of trust in our society, and to our capital markets. And do not permit SIFMA, FSI and others to abscond with the true fiduciary duty of loyalty, and to replace it with an institutionalization of the betrayal of trust.

Ron Rhoades, JD, CFP(r), is an Asst. Prof. at Alfred State College, where he serves as Program Director for its Financial Planning Program. A frequent writer on the application of the fiduciary standard to financial and investment advisory activities, he also currently serves as the Chair of the Steering Committee for The Committee for the Fiduciary Standard.

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