When you invest money, you trust financial professionals to handle your affairs responsibly. This trust is based on something called a “fiduciary duty.” This means that these advisors must always put your best interests first.
The term “fiduciary duty” is often discussed by lawyers who focus on financial matters. It involves both ethical and legal responsibilities that certain professionals must follow when working for their clients.
Professionals like lawyers, real estate agents, and trustees have a legal duty to act in their clients’ best interests. They must avoid any actions that might benefit themselves at the expense of their clients. This high standard ensures that they act with honesty and transparency, protecting your financial interests.
If you are worried about your financial advisor meeting these standards, consider talking to a lawyer. A lawyer can help you understand fiduciary duty.
Fiduciary Duty Responsibilities of Investment Advisers
Investment advisers have a fiduciary duty to their clients, which includes several key responsibilities:
- Use reasonable care when giving advice or making decisions for clients.
- Avoid misleading clients in any way.
- Get the best price and terms for each transaction.
- Always put the client’s interests ahead of their own.
- Disclose any potential conflicts of interest.
- Never use clients’ assets for personal gain.
- Fully share any important details about a transaction.
Courts have stressed that stockbrokers must act in the highest good faith toward their customers.
Brokerage Firms and Fiduciary Duty
Brokerage firms also have fiduciary duties. They must follow industry rules and regulations, supervise their employees, and monitor investments before and after transactions. If someone fails to meet these obligations, they can breach their fiduciary duty and face legal consequences.
New Regulations: Regulation Best Interest (Reg BI)
On June 30, 2020, new rules called Regulation Best Interest (Reg BI) came into effect. These rules set a higher standard for broker-dealers when recommending securities or investment strategies. Reg BI has two main parts:
- Broker-dealers must act in the best interest of their retail customers. They should not prioritize their own interests.
- Specific Requirements: There are detailed rules covering Disclosure, Care, Conflict of Interest, and Compliance. Broker-dealers must meet all these requirements to follow Reg BI.
Fiduciary Duties in Wall Street Firms
Wall Street firms, particularly those managing 401(k) plans, have statutory fiduciary duties under The Employee Retirement Income Security Act (ERISA). These duties include:
- Loyalty: Acting solely in the interest of plan participants.
- Prudence: Making careful investment decisions.
- Diversification: Spreading investments to minimize risk.
- Following Plan Documents: Adhering to the plan’s guidelines.
Breach of Fiduciary Duty
If a financial adviser or firm puts their own interests before the client’s, it may break their duty to the client. Understanding these duties can help ensure that your financial adviser is acting in your best interests.
Bakhtiari & Harrison – Trusted Securities Attorneys
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