Real Fiduciary™ Practices Professional Conduct Guidance for Advisors February 22, 2019
The Institute for the Fiduciary Standard’s Real Fiduciary™ Practices describe how conscientious and competent advisors serve clients today. The practices reflect principles that underlie fiduciary law and focus on the three overriding advisory duties of Loyalty, Due Care and Utmost Good Faith.1 The Institute defines these terms as follows:
Loyalty means steadfast and uncompromising devotion to a client’s best interest.
Due care means following a prudent process and applying the necessary professional skills as evidenced by appropriate education, expertise and experience.
Utmost good faith means acting at all times with honesty, integrity and transparency
Many advisors and brokers talk like a fiduciary, though relatively few act like one. These Real Fiduciary™ Practices provide guidance for advisors. They also help investors distinguish advisors who work for and are paid only by clients—from sales representatives who work for and are paid by firms to distribute products. That is, these practices help separate brokers and advisors who merely talk like a fiduciary from advisors who really act like one. 2
Real Fiduciary™ Advisors stand apart because they:
1. Act as a fiduciary at all times. Affirm this commitment to the client in writing.
Affirm that the fiduciary standard under common law and the Investment Advisers Act of 1940 3 (and when applicable, ERISA) governs all professional advisory client relationships at all times at both the advisor and the firm level.4
2. Decline any sales-related compensation.
Accept compensation that is paid by the client in the form of a percentage of assets under management, retainers, fixed fees or hourly fees. Decline any compensation associated with transactions and product sales such as commissions, shelf space payments and 12b-1 fees.5
3. Avoid conflicts of interest.
Understand that a conflict of interest occurs when the interests of the advisor or the advisor’s firm interfere with the advisor’s fiduciary duties to clients. A conflict is material when it could reasonably be deemed to affect how a client who understands the conflict decides to act. Material conflicts are inherently harmful.6 Eliminating or avoiding these conflicts when possible has been the cornerstone of fiduciary law for centuries.
4. Mitigate unavoidable conflicts.
Mitigating material conflicts means, at minimum, receiving appropriate client consent before
executing the recommendation. The advisor will do the following:
• Explain the conflict in sufficient detail, both orally and in writing, so the client fully
understands the conflict. Disclosure of conflicts of interest is a well-established
obligation of the Investment Advisers Act of 1940 and a key requirement of Form ADV.7
• Ensure that the client understands the implications of the conflict. This includes the
relative merits of options not recommended by the advisor and any additional
compensation that may be earned by the advisor.
• Receive informed, intelligent and independent consent from the client in writing before
any advice is implemented.
• Document and be prepared to demonstrate that the conflicted advice remains
reasonable and fair and consistent with the client’s best interest.
ACT WITH DUE CARE
5. Maintain professional knowledge and competence.
Demonstrate baseline competence by holding a recognized designation which requires
significant study and knowledge, experience and ongoing continuing education requirements,
such as the CFP®, CPA/PFS or CFA designations. Decline to provide advice, regardless of its
scope, unless the advisor possesses the appropriate expertise.
6. Explain agreements and disclosures clearly and truthfully, both orally and in writing.
Put all important client agreements and disclosures in writing. Do not make oral or written
statements that are misleading. Client understanding of the advisor’s actions is important in
relationships of trust and confidence.
7. Establish and document a reasonable basis for advice.
Document relevant facts and circumstances supporting the advisor’s advice in a manner that is
appropriate for the scope and nature of the client engagement and for the client’s goals and
overall circumstances. Upon client request, provide a brief summary written in plain language
of each recommendation and its respective reasonable basis. Having a “reasonable basis” for
investment advice is a well-established obligation of the Investment Advisers Act of 1940.8
8. Follow and document a prudent due diligence process for rendering investment advice.
Research and analyze investment vehicles in a responsible manner. Use an investment policy
statement that is based on a clear understanding of the client’s circumstances and preferences
and that clearly specifies assumptions regarding objectives, risk, and performance. Report
performance based on data supplied by an independent third party and calculated using
industry standard methods.
ACT IN UTMOST GOOD FAITH
9. Decline gifts or entertainment or other benefits unless minimal in value, occasional in
frequency, and consistent with the advisory firm’s gift and vendor relation policies.
Decline any gifts or third-party compensation or other benefits received by the advisor or the
advisor’s firm that could impair advisor objectivity. Upon request, provide the firm’s policy on
gifts and entertainment. Explain clearly, both orally and in writing, any ongoing benefits the
advisor or the advisor’s firm receives from other entities.
10. Charge reasonable fees and incur reasonable investment costs. Disclose and fully explain.
Provide in writing at the outset of the advisory relationship, and upon request throughout the
client engagement, a good faith description and estimate of anticipated fees, investment costs
and tax implications.9 Have procedures to check that client expenses are reasonable. Be aware
that controlling investment expenses does not require the least expensive alternative; it does
require a reasonable basis for selecting a more expensive alternative.
Christopher W. Cannon, CFA, FirsTrust
Paula H. Hogan, CFP®, CFA, Hogan Financial
Stephen D. Johnson, MBA, CFP®, Johnson Lyman Wealth Advisors
William C. Prewitt, M.S., CFP®, Charleston Financial Advisors
Knut A. Rostad, MBA, Institute for the Fiduciary Standard
Daniel Bernstein, JD, Associate General Counsel to the Real Fiduciary™ Practices Board
Clark M. Blackman II, CFA, CPA/PFS, AIF®, Alpha Wealth Strategies (Emeritus)
1. Investors seek professional advice that is competent, objective, transparent and
understandable. “Real Fiduciary”™ Practices communicate duties that are concrete,
understandable and verifiable. The practices are intended to reflect how conscientious and
competent advisors can serve clients today, mindful of the wide variety of risks and costs of
various investment strategies and varying client needs, profiles and levels of sophistication.
Real Fiduciary™ Practices reflect the principles-based nature of fiduciary law that is anchored
by core values and norms. It is these values and norms that must remain steadfast because, as
law professor Tamar Frankel notes, “…without them no society can survive.” See Tamar
Frankel, “Fiduciary Law in the Twenty-First Century," Boston University Law Review
(BU School of Law) Vol 91 May 2011 Number 3 http://www.bu.edu/law/journalsarchive/
2. Two Institute white papers precede Real Fiduciary™ Practices. The first paper, “Six Core
Fiduciary Duties for Financial Advisors,” September 9, 2013, discusses these duties in
practical contexts. http://www.thefiduciaryinstitute.org/wpcontent/
The second paper, “Key Principles for Fiduciary Best Practices and an Emerging Profession,”
September 10, 2014, sets out the rationale for focusing the Real Fiduciary™ Practices on
ethical criteria, avoiding conflicts of interest, the reasonableness of fees and expenses, and on
communications that are clear, complete and truthful.
3. Scholar Ron A. Rhoades writes that fiduciary duties under the Investment Advisers Act of
1940 and ERISA “should be informed by state common law.” See “Proposed Interpretation of
Fiduciary Duties Arising Under the Advisers Act,” August 6, 2018.
Further, Rhoades writes that the term “best interest” is an “expression of the fiduciary
standard.” See “(Proposed) Regulation Best Interests,” August 6, 2018.
4. The importance of applying the practices to both the advisor and the firm is underscored by
the confusion created when a firm states it is “RIA only” while representatives affiliated with
the firm continue to receive commissions, or when, in the case of Commonwealth Financial
Network, some of its registrants shift their business at Commonwealth “totally” to the “feeonly”
unit yet still receive outside commissions. (While Commonwealth boasts their
supposedly “fee-only” status within Commonwealth, some of these same representatives
continue to receive commissions from others and therefore must self-identify as receiving
“commissions and fees” in their CFP Board listings.) These circumstances can create
5. Investor harms from product sales portrayed as unbiased advice were believed widespread in
the 1920s and 1930s. In 1940 many investment counsellors and policy makers were deeply
concerned with conflicted advice. This concern animated their thinking and significantly
shaped the Investment Advisers Act of 1940. See SEC v Capital Gains Research Bureau.
6. One SEC director underscored conflict harms by comparing conflicts to “…viruses that
threaten the organization’s well-being.” See Carlos V. de Florio, Director, SEC Office of
Compliance Inspections and Examinations. https://www.sec.gov/news/speech/2012-
7. Form ADV, General Instructions for Part 2 of Form ADV. “…As a fiduciary, you must also
seek to avoid conflicts of interest with your clients, and, at a minimum, make full disclosure of
all material conflicts of interest between you and your clients that could affect the advisory
relationship. This obligation requires that you provide the client with specific facts so that the
client is able to understand the conflicts of interest you have and the business practices in
which you engage and can give informed consent to such conflicts or practices or reject them.”
Also see, op cit Rhoades, August 6, 2018 comment letter to the SEC, “…Fiduciary Duties …”
https://www.sec.gov/comments/s7-09-18/s70918-4174272-172353.pdf at pp. 65-80 which
discusses in detail the obligations required of an advisor in order to overcome the burden
presented by a material conflict of interest.
8. Securities attorney Lorna Schnase offers a brief summary. “Generally, reasonable basis for an
investment recommendation usually starts with knowing the client, which would typically
contemplate documentation of the client’s circumstances and goals (client intake
questionnaires, for example). For investment advice recommending specific investments,
documentation would typically include disclosure documents for the investment (prospectus,
offering memorandum, etc.). Of course, more extensive documentation of due diligence could
be expected (for example, notes of interviews with issuer executives, market analyses, internal
or external broker research reports, etc.) for investments that are alternative, riskier, or contain
unusual features. There is usually a wide variety of documentation that could support a claim
of “reasonable basis” from the investor’s standpoint, the standpoint of the particular
investment, and everything that could connect the two.” (Email to K Rostad, 11-18-16.)
Also see, AICPA’s “Statement on Standards in Personal Financial Planning Services” at p. 14,
9. Such a report is now required annually of advisors in Europe. See European Securities and
Markets Authority, Questions and Answers on MiFID II, p. 72-84.