What are the fiduciary duties of an RIA firm?

Learn more about the fiduciary duties of an RIA firm and how to fulfill them.

In 2018, the Securities and Exchange Commission ("SEC") released a document that outlined their views on the fiduciary duties of an RIA, breaking them out into five categories.

1. Duty of Care

The duty of care includes, among other things:

  • The duty to act and to provide advice that is in the best interest of the client,
  • The duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and
  • The duty to provide advice and monitoring over the course of the relationship.

2. Duty to Provide Advice that is in the Client's Best Interest

An RIA’s fiduciary duty does not necessarily require the firm to recommend the lowest cost investment product or strategy. That said, it is difficult to argue that a security recommendation is in the best interest of a client if it is higher cost than a security that is otherwise identical (including any special or unusual features, liquidity, risks and potential benefits, volatility and likely performance).

For example, if an RIA advises its clients to invest in a mutual fund share class that is more expensive than other available options, the firm may be violating its fiduciary duty and the antifraud provisions of the Advisers Act. This is particularly true if when the RIA or its personnel are receiving compensation that creates a potential conflict and if the firm does not, at a minimum, provide full and fair disclosure of the conflict, describe its impact on the client, and obtain informed client consent regarding the conflict.

3. Duty to Seek Best Execution

When seeking best execution, an RIA should consider “the full range and quality of a broker’s services in placing brokerage including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness” to the investment adviser.

In other words, the determinative factor is not the lowest possible commission cost but whether the transaction represents the best qualitative execution. Further, an investment adviser should “periodically and systematically” evaluate the execution it is receiving for clients.

4. Duty to Act and Provide Advice and Monitoring over the Course of the Relationship

An RIA is required to provide advice and services to a client over the course of their relationship at a frequency that is both in the best interest of the client and consistent with the scope of advisory services agreed upon between the investment adviser and the client.

The duty to provide advice and monitoring is particularly important for an adviser that has an ongoing relationship with a client (for example, a common relationship where the adviser is compensated with a periodic asset-based fee or an adviser with discretionary authority over client assets).

5. Duty of Loyalty

An RIA must seek to avoid conflicts of interest with clients, and, at a minimum, make full and fair disclosure to clients of all material conflicts of interest that could affect the advisory relationship. However, disclosure of a conflict alone is not always sufficient to satisfy the adviser’s duty of loyalty and Section 206 of the Advisers Act.

Any disclosure must be clear and detailed enough for a client to make a reasonably informed decision to consent to such conflicts and practices or reject them. An investment adviser must provide the client with sufficiently specific facts so that the client is able to understand the adviser’s conflicts of interest and business practices well enough to make an informed decision. For example, an RIA disclosing that it “may” have a conflict is typically not adequate disclosure when the conflict actually exists.