July 28, 2009
SUMMARY
Relatively little discussion has occurred to help policy makers and investors compare the differences and similarities, as currently required in law, between a fiduciary relationship and an arms length relationship.
An arms length relationship requires a minimum level of care in the free market, where caveat emptor generally rules. The firm or broker has no duty to further a customer’s interests. Requirements of “fair dealing” and “good faith” do apply and generally prohibit dishonest conduct by both parties.
In contrast, the authentic fiduciary standard requires the RIA to always put the best interest of the client first, fully disclose all important facts and conflicts, and then manage any unavoidable conflicts in the investor’s interest.
While both brokers and RIAs are required to fulfill certain practices in common (best execution, supervision, etc.) and certain circumstances exist where fiduciary duties are imposed on brokers, in the main, the two standards contain far more differences than similarities.
Not only do these standards impose very different duties, but they also structure the role of the intermediary (broker or RIA) differently. In the commercial contractual relationship, the broker is not generally prohibited to put his or her own best interest first; in a fiduciary relationship the adviser must put the client’s best interest first.
Though these differences reflect legal requirements, it is clear that some brokers exceed these legal requirements and conduct themselves as fiduciaries, while some RIAs fail to meet the requirements of a fiduciary relationship.