Investment advisors are bound to a fiduciary standard that was established as part of the Investment Advisors Act of 1940. SEC or state securities regulators hold advisors to a fiduciary standard that requires them to put their client’s interests above their own.
The Act defines what a fiduciary means. It outlines that an advisor must place his or her interests below that of the client. It consists of a duty of loyalty and care. This means that the advisor must act in the best interest of the client. For example, the advisor can’t buy securities for their own account prior to buying them for a client. The advisor is also prohibited from making trades that may result in higher commissions for the advisor or his or her investment firm.
Acting under the Fiduciary Standard also means that the advisor must do their best to make sure the investment advice they give is made using accurate and complete information. Their analysis must be thorough and as accurate as possible. Avoiding conflicts of interest is important when acting as a fiduciary. This means that the advisor is required to disclose any potential conflicts to placing the client’s interests ahead of their own. The advisor must place trades under a “best execution” standard, meaning they must strive to trade securities with the best combination of low cost and efficient execution.