Broker Check

Fiduciary Responsibility - What is it and who has it?

April 08, 2022

The concept of fiduciary rules has been recognized since ancient times, in fact dating back to one of the earliest and most complete written legal codes in the world, the Code of Hammurabi. Proclaimed by the Babylonian King Hammurabi, who reigned from 1792 to 1750 B.C., it was a collection of 282 rules that established standards for commercial interactions and set fines and punishments to meet the requirements of justice. Fiduciary rules can also be found in Roman and British common law, and have been part of Jewish, Christian, and Islamic religious laws for decades. Fiduciary law also appears historically in European, Chinese, Japanese and Indian laws. Fiduciary duties have been central to the functioning of societies from ancient to modern times and from East to West.

Basically, a fiduciary duty occurs when one person relies on another to perform a task or service for them. The responsibility of a fiduciary remains the same across many types of professional relationships, including lawyers, estate executors, trustees of trusts, directors of corporations, and even real estate agents. They must act in the best interest of their customers, clients or shareholders, and if they don’t, they are legally liable. In the financial industry, under the SEC’s (U.S. Security and Exchange Commission) Investment Advisers Act of 1940, registered investment advisers (RIAs) are fiduciaries and must act in their clients’ best interests. But it is important to note, not all financial professionals are fiduciaries.

Brokers are an intermediary that accepts and executes orders from clients, and are usually compensated by charging a commission on each trade they execute. They register with the Financial Industry Regulatory Authority (FINRA), a government-authorized not-for-profit private organization, not a government agency like the SEC. FINRA, which is overseen by the SEC, enforces a “suitability rule” for brokers, meaning they must have reasonable grounds for believing a recommendation fits the investment needs of a client at the time of the recommendation, but they don’t always have to act in their client’s best interest. Since brokers are compensated by charging commissions, the lack of a fiduciary standard means they could recommend products that raise their compensation rather than being in the client’s best option.

When looking for a financial advisor, fiduciary is a good word to hear. A registered investment advisor must:

  • Put their clients’ best interests before their own and seek the best prices and terms.
  • Be transparent, act in good faith and provide all relevant facts to clients.
  • Disclose any potential conflicts of interest to clients.
  • Offer clients an unbiased view and opinion, ensuring the advice they provide is accurate.
  • Respect a client’s financial goals and risk tolerance, advise them accordingly, and recommend appropriate action.

All investment advisors registered with the SEC or a state securities regulator must act as fiduciaries. Broker-dealers, stockbrokers and insurance agents, however, are only required to fulfill a suitability obligation at the time of the transaction. This means that while they must provide suitable recommendations to their clients, they don’t have to put their clients’ interests before their own. Therefore, it’s important for you to know who you are working with and be aware of the standards they hold when managing your money.

Ciccarelli Advisory Services is an independent registered investment advisory firm and, as a fiduciary, is held to the highest level of care and is required to act in the best interest of our clients at all times. We have been helping families meet their lifelong goals by creating comprehensive, customized financial plans that work continually throughout every stage of life. Our highest priority is in designing a plan that reflects our client’s priorities and vision, and empowering them to achieve continual financial wellness.