Do I Have a Bridge for You: Fiduciary Duties and Investment Advice

University of Pennsylvania Journal of Business Law, Vol. 17, 2015

St. John's Legal Studies Research Paper No. 19-0015

67 Pages Posted: 23 Jun 2013 Last revised: 26 Apr 2019

Date Written: April 19, 2014

Abstract

The debate about financial advice in the United States has taken a wrong turn. Instead of focusing on particular practices and the potential that these practices raise for conflicts of interest between advisers and their clients, the debate has focused recently on whether brokers, advisers to municipal and state issuers, and advisers to employee benefit plans regulated by ERISA should be held to a fiduciary duty standard. A fiduciary standard implies, in the words of Justice Cardozo, that “[a] trustee is held to something stricter that the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” The thought is that brokers and ERISA advisers will be more attentive to their clients’ needs if such a fiduciary standard applies. Certainly, this is the basis upon which the Department of Labor is currently considering rules that apply fiduciary standards to ERISA advisers.

This article argues that this reliance on fiduciary duties is misplaced. In part, this is because most fiduciary duties that arise with respect to financial advice can be modified by an agreement between the fiduciary and the beneficiary. There are procedural limits to ensure that a beneficiary has both the capacity and the information necessary to enter into a particular arrangement. But fiduciary duties turn out to be just a more punctilious version of contract law, with a few exceptions. This general contractual principle applies to both state fiduciary duties and to federal fiduciary duties that arise under statutes such as the Investment Advisers Act of 1940, the Investment Company Act of 1940 and ERISA.

Keywords: fiduciary duty, investment advice, investment advisers, investment management

JEL Classification: K22, K23

Suggested Citation

Facciolo, Francis, Do I Have a Bridge for You: Fiduciary Duties and Investment Advice (April 19, 2014). University of Pennsylvania Journal of Business Law, Vol. 17, 2015, St. John's Legal Studies Research Paper No. 19-0015, Available at SSRN: https://ssrn.com/abstract=2283200 or http://dx.doi.org/10.2139/ssrn.2283200

Francis Facciolo (Contact Author)

St. John's University School of Law ( email )

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