Welcome to the Institute for the Fiduciary Standard!
The Institute is a nonprofit formed in 2011 to benefit investors and society through its research, education and advocacy of the fiduciary standard’s importance to investors, our capital markets and economy. Six key fiduciary duties embody the fundamental elements of an investment fiduciary’s responsibility. These duties are:
- Serve the client’s best interest
- Act in utmost good faith
- Act prudently – with the care, skill and judgment of a professional
- Avoid conflicts of interest
- Disclose all material facts
- Control investment expenses.
These six key duties generally describe what it means to put investors’ best interests first. They also describe what most investors believe (according to numerous independent studies) all advisors are supposed to do. Unfortunately, this is not true. Only Registered Investment Advisers are required to meet the fiduciary standard, follow the six key duties and put the best interests of investors first.
This widespread misunderstanding is a key reason the Institute for the Fiduciary Standard formed to provide education. Our objective here is to help investors understand the fundamentally different roles, roles that are set in law and are at odds with each other, of the different types of advisors.
The fiduciary is required to put investors’ best interests first, act prudently; disclose conflicts and all important facts (including all investment expenses); either avoid or manage in the investor’s interest all material conflicts; control investment expenses; follow and document a due diligence process; and diversify investments. Other advisors, non fiduciaries, generally, have no such requirements (though many voluntarily try to meet the fiduciary standard.)
Fiduciaries’ greater duties begin to reveal how fiduciaries are different from non fiduciaries. A fiduciary must represent the client’s interests, or as law professor Arthur Laby notes, adopt the objectives of the client. A sales professional, in contrast, must deal “fairly” with investors, but must also generally represent the interests of his or her firm. Attorney Michael Koffler notes many broker-dealers are “contractually obligated” to distribute the same securities on which they advise investors.
The fiduciary represents his client’s interests; the salesperson, generally must represent the firm’s interests. Their roles are at odds. Can a salesperson be incentivized to sell certain products and also give objective advice? Research suggests it is very difficult. (See “Conflicts of Interest a Cancer on Objectivity” https://thefiduciaryinstitute.org/fiduciary-forum-2011.)
We are in football season, and from peewee to the pros, this (the next football game) is where many Americans live. This is also where we can better see how different fiduciaries are from sales persons, and how their legal duties and roles are at odds. Coaches of opposing teams are at odds and have opposing interests. Though both coaches must play “fairly”, there is simply no question their respective interests and objectives are “opposed,’ and they compete hard to win. In the pros, there is only one Super Bowl winner.
Read through our web site. Learn how the Institute is promoting the fiduciary standard to benefit investors. Send us your comments. Support our work. Thank you for your interest in the Institute.
Knut A. Rostad
President, The Institute for the Fiduciary Standard