There is a general understanding that investment advisers have a fiduciary relationship with their clients – in other words, that they are required to act in the client’s best interests. But although this concept makes sense in the abstract, it isn’t always clear what an adviser needs to do to fulfill their fiduciary duty in real-life situations.
In 2019, the SEC released a Commission Interpretation that separated the obligation of RIAs to act in their clients’ best interests into separate duties of care (to provide investment advice in the best interest of the client) and loyalty (to eliminate or disclose all potential conflicts of interest with the client). But while that interpretation clarified at a high level the SEC’s view on what constitutes an adviser’s fiduciary duty, it didn’t provide many actionable takeaways for RIAs to shape their conduct.
So in April 2023, SEC staff released a Staff Bulletin (which, although not an ‘official’ pronouncement of the SEC, does represent the views of the staff who actually conduct adviser examinations and pursue enforcement of the SEC’s regulations) to further explain the investment adviser’s duty of care, particularly as it regards to working with retail investor clients.
According to the Staff Bulletin, there are 3 overarching components involved in performing an adviser’s duty of care: 1) An understanding of the potential risks, rewards, and costs of a recommended investment; 2) an understanding of the client’s overall financial picture as it relates to the investment; and 3) a reasonable basis for concluding that the recommendation is in the client’s best interest. These 3 components in practice make up a core part of the adviser’s fiduciary duty to their clients.
The Staff Bulletin also includes some best practices to help advisers show that they followed the standard of care, such as inventorying all investment products deployed in client accounts and performing a reasonable investigation into how each product works; analyzing the total cost of each investment (including fees, commissions, and taxes); creating an ‘investment profile’ of relevant information for each client (for which the bulletin provides a list of specific items to consider); and considering a range of possible alternatives to each investment in order to have a reasonable basis to believe the one chosen is indeed in the client’s best interests.
Additionally, the Staff Bulletin includes details for registered broker-dealer representatives subject to the SEC’s Regulation Best Interest (Reg BI) rule. Most notably, while the bulletin states that the fiduciary obligations are generally the same between RIAs and broker-dealers whose fiduciary obligations are triggered under Reg BI, dually registered broker-dealer representatives are also obliged to disclose the capacity in which they are acting (i.e., as a broker-dealer representative or an investment adviser representative) and to consider whether a brokerage account or an advisory account is better suited for a client (depending on whether the client is just looking to purchase a product, or whether they’re seeking ongoing advice and management).
Ultimately, although many advisers may find the numerous requirements for ongoing due diligence and documentation daunting, the reality is that the Staff Bulletin simply seeks to enumerate how advisers can fulfill their already existing fiduciary responsibilities, many of which were previously left open to interpretation (and often only clarified when the SEC decided to pursue an enforcement action against a firm for breaching those duties). Which hopefully means that it will be easier for firms to understand how specifically to serve as fiduciaries for their clients, since they now have a clear (or at least clearer) path for doing so!
