The Fiduciary Obligations of Financial Advisors Under the Law of Agency

Abstract

This paper considers how agency fiduciary law might be applied to a financial advisor with discretionary trading authority over a client's account. It (i) surveys the agency problem to which the fiduciary obligation is directed; (ii) examines the legal context by considering how the fiduciary obligation undertakes to mitigate this problem; and (iii) examines several potential applications of agency fiduciary law to financial advisors, including principal trades and the role of informed consent by the client, organizing the discussion under the great fiduciary rubrics of loyalty and care. This paper was sponsored by Federated Investors, Inc.

Keywords: fiduciary, agency, financial advisor, broker-dealer, investment advisor, agency costs, principal trades

JEL Classification: K12, K22, H30