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What Is the Duty of Loyalty for Fiduciaries?


Fiduciaries are bound by a legal and ethical obligation known as the duty of loyalty, which requires them to act in the best interests of their clients. This mandate ensures that fiduciaries prioritize their clients’ needs above their own, avoiding conflicts of interest and making decisions that benefit the clients. Whether it’s a financial advisor, trustee or board member, understanding the fiduciary duty of loyalty is fundamental to maintaining trust and integrity in professional relationships.

If you need help finding a fiduciary financial advisor who will put your best interests first, SmartAsset can help you match with up to three vetted advisors who serve your area.

What Is a Fiduciary?

A fiduciary is a person or entity that represents another party, prioritizing the interests of their clients above their own. This role is founded on trust, requiring the fiduciary to act in the client’s best interest. Examples of fiduciaries include financial advisors, attorneys and executors.

Fiduciary relationships vary based on the context and the parties involved. A trustee-beneficiary relationship involves managing assets within a trust. In a guardian-ward relationship, the guardian makes decisions for the ward’s welfare. Financial advisor-client relationships focus on managing investments and financial planning, ensuring the client’s financial health.

While a range of professionals may act as fiduciaries, financial advisors are bound to specific duties outlined by the Investment Advisers Act of 1940. The Securities and Exchange Commission’s (SEC) released an detailed interpretation of fiduciary duty in 2019, explaining that investment advisors have a duty of care and a duty of loyalty to clients.

Duty of care requires an investment advisor to provide advice that is in the best interest of the client, seek the best execution of transactions, as well as provide advice and monitoring throughout their relationship with a client.

What Is Fiduciary Duty of Loyalty?

A fiduciary financial advisor meets with clients an explains how fiduciary duty works.

At its core, the fiduciary duty of loyalty requires fiduciaries to avoid conflicts of interest. This means they must not exploit their position for personal gain. If a conflict arises, fiduciaries must disclose it to their clients and either resolve it in favor of the client or recuse themselves from the decision-making process.

Transparency is another key aspect of a fiduciary’s duty of loyalty. Fiduciaries must provide complete and accurate information to their clients, ensuring that all actions and recommendations are in the client’s best interest. This honesty builds trust and confidence, forming the foundation of a strong fiduciary relationship.

According to the SEC, the duty of loyalty requires investment advisors to:

1. Act in the Best Interests of Clients:

Investment advisors must prioritize their clients’ interests above their own, ensuring that all actions and recommendations serve the client’s best interests. In turn, advisors are obligated to identify and avoid conflicts of interest.

2. Provide Full and Fair Disclosure

When conflicts are unavoidable, they must fully and fairly disclose these conflicts to clients, ensuring that clients can make informed decisions. They must disclose all material facts related to their relationship with the client, including any potential conflicts of interest, in a manner that clients can understand. This transparency allows clients to make informed choices about whether to continue the relationship.

“This will be particularly relevant for firms or individuals that are dually registered as broker-dealers and investment advisers and who serve the same client in both an advisory and a brokerage capacity,” the SEC explained in its 2019 interpretation of fiduciary duty.

“This disclosure may be accomplished through a variety of means, including, among others, written disclosure at the beginning of a relationship that clearly sets forth when the dual registrant would act in an advisory capacity and how it would provide notification of any changes in capacity.”

3. Ensure Client Consent

After disclosing a conflict of interest, advisors must obtain the client’s informed consent to proceed with the advice or action. This consent should be explicit and based on a clear understanding of the conflict.

For disclosure to be considered full and fair, it must be detailed enough for a client to comprehend the material fact or conflict of interest and make an informed decision about whether to give consent, according to the SEC.

“For example, it would be inadequate to disclose that the adviser has ‘other clients’ without describing how the adviser will manage conflicts between clients if and when they arise, or to disclose that the adviser has ‘conflicts’ without further description,” the SEC stated.

Bottom Line

A financial advisor shakes hands with a client.

The fiduciary duty of loyalty is essential for maintaining trust and integrity in professional relationships, whether involving financial advisors, trustees or board members. This duty requires fiduciaries to prioritize their clients’ interests, avoid conflicts of interest and make decisions that benefit the clients. Transparency and full disclosure are important elements, ensuring that clients are fully informed and can make educated decisions about their financial matters.

Tips for Finding a Financial Advisor

  • Keep in mind that even a fiduciary can have conflicts of interest, but that doesn’t mean you can’t or shouldn’t work with them. The key is to recognize potential conflicts of interest, seek an advisor who openly discusses these conflicts both at the start and throughout your working relationship, and handle them with care and consideration.
  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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