Fiduciary Duty
A fiduciary duty obliges someone to act in your interest rather than their own, including disclosing conflicts. It is narrower than it sounds — the duty attaches to particular activities rather than to a person, so the same adviser can owe it on one piece of business and not on another.
Everyone giving financial advice describes themselves as acting in your interest, and most of them mean it. The question is which of them is legally obliged to, on which parts of what they do — and that is a narrower question with a more useful answer.
How it works
A fiduciary is obliged to place your interest above their own, to avoid conflicts where possible and to disclose those that remain. It is a legal standard rather than a description of character.
A suitability standard asks only whether the recommendation is appropriate. Two products can both be suitable while one is materially better for you and materially better for them, and suitability does not require choosing the first.
That gap is measurable in fees. On this site’s arithmetic a 75-basis-point annual difference
removes 20.2% of a thirty-year pot — so a suitable-but-more-expensive recommendation can cost a fifth
of a lifetime result. The figures are in research/series-measurements.json.
It attaches to the activity
The duty follows what somebody is doing rather than who they are. A firm can advise under a fiduciary standard on a managed portfolio and sell an insurance product under a different standard on the same afternoon.
Which is why “are you a fiduciary” is the wrong question. It gets a yes, honestly, from someone who owes the duty on part of their business.
The useful version is: does it apply to every recommendation you make to me. That question separates the arrangements, and it is answerable in one sentence.
A worked example
Take two funds tracking the same broad index, one at 8 basis points and one at 85.
Both are suitable for a long-horizon investor. Neither is inappropriate, neither is unusual, and both would pass a suitability test comfortably.
Only one of them pays the seller. Under a suitability standard, recommending the expensive one is permitted; under a fiduciary standard, preferring it because of the payment is not.
Over thirty years the 77-basis-point difference is roughly a fifth of the ending balance, and no single statement ever shows it.
What it does not do
It does not promise a good result. A fiduciary can recommend something that falls; the duty is about the basis on which the recommendation was made, not about what happened next.
It does not eliminate conflicts. Many are permitted if disclosed, and disclosure typically appears in a document nobody reads at the point of signing.
And it does not extend to what was never discussed. Advice on a portfolio does not imply advice on a pension held elsewhere.
Where the conflicts live
Proprietary products, revenue sharing, transaction-based compensation and referral arrangements are the usual ones. None requires bad faith to influence a recommendation — where two options are both defensible, the one that pays tends to get chosen slightly more often.
Asking for the conflicts in writing is ordinary and reasonable. A firm that produces the list quickly has answered the question; one that finds it awkward has answered it too.
The disclosure document is usually where they are listed, and it is written to be complete rather than to be read. Skimming it for the words “we may receive”, “affiliate” and “proprietary” finds most of what matters in a couple of minutes.
Costs
Leaving an arrangement can be expensive. Proprietary funds may have to be sold rather than transferred, and in a taxable account that is a disposal. On this site’s shared series a round trip measures about 2% of the median bar range of 0.493.
All of which is cheaper to establish at the start than to discover after several years of accumulated positions.
The original data
Of the 24,971 unique videos in research/search-study-corpus.jsonl, zero have a title about
fiduciary duty. Financial advisers appear in 5 videos at a median of 516,713 views and robo-advisers
in zero. The counts come from site/rank_investing.py, which deduplicates by video id.
Zero videos on the legal standard governing financial advice, against 5 on hiring an adviser at half a million median views each. People search for whether to hire someone and not for what obligation that person will owe them, which is the more decision-relevant of the two.
The answer to the question on that chart is that it is the start of the conversation. Ask whether it applies to every recommendation, ask how they are compensated and whether it varies by product, and ask for both in writing. Three questions, one meeting, and they settle more about the arrangement than any amount of research into credentials.
When it fails
The failure is a standard that applies to the advice and not to the products sold alongside it. The portfolio recommendation is made under a fiduciary obligation and is genuinely reasonable; the insurance product sold in the same relationship is not covered by it, and the client has no way to tell which conversation they are in. Both interactions look identical, the same person is on the other side of the table, and only one of them carried the obligation the client believed applied throughout.
The second failure is treating disclosure as resolution. A disclosed conflict is still a conflict.
A third is asking the yes-or-no question. It gets a yes almost every time.
A fourth is expecting it to cover outcomes. It governs process.
A fifth is assuming it extends to everything you own. It covers what was engaged.
And a sixth is not getting it in writing. The verbal answer is the generous version.
Related
Financial advisers covers what to ask and how fees are structured. Robo-advisers is the automated alternative and its own conflicts. And expense ratio is where the cost of a conflicted recommendation shows up.
The question that gets a useful answer is not ‘are you a fiduciary’. It is ‘does that apply to every recommendation you make to me, including product sales, and will you put that in writing’. The first question gets a yes almost every time. The second one is the one that varies.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.