Fiduciary Principles in Investment Advice

Abstract

The importance of investment advisers to the financial well-being of their clients cannot be overstated. Individuals and institutions entrust trillions of dollars to investment advisers to manage on their behalf. This paper discusses and explains fiduciary principles in investment advice. Looking at United States federal and state law, the paper first addresses when an adviser is considered a fiduciary. Next, it discusses the fiduciary duty of loyalty and how the duty is expressed and applied in investment advisory relationships. The paper then takes up the fiduciary duty of care and how it differs from other standards of conduct, such as a duty of suitability. The paper then reviews other legal obligations imposed on investment advisers and explains how those obligations relate to an adviser’s fiduciary duty. It then examines whether an investment adviser’s fiduciary duties are mandatory or can be subject to modification by the parties. Finally, the paper discusses remedies available for breaches of fiduciary duty.

Keywords: investment advisers, investment advice, financial institutions, fiduciary law, fiduciary duties

JEL Classification: D23, D40, D70, D80, G21, G23, G24, G28, K10, K19, K20, K22, K23, K39, K42, M10, N20, N80