Definition
A fiduciary is a person or organization that has a
duty to another person to put that person's interests ahead of the
fiduciary's own interests. A fiduciary has a duty to protect the others
person's best interests.
Distinguishing Characteristics
It may help to distinguish a fiduciary's duty with
that of another, more familiar relationship:
Merchant's Duty: Duty not to defraud. A
merchant has a duty to provide an exchange for value free from fraud, but
does not have a duty to put the interests of the customer above the
merchant's own interests. A merchant can do or recommend what is best for
the merchant, as long as there is no fraud involved.
Fiduciary's Duty: Duty to protect. A
fiduciary has a duty to do what is in the client's best interest. This
means not only providing a fair exchange, but the best action for the
client, even if it is not in the fiduciary's own best interest.
Application in Finance and
Investments
Broker: A broker is a merchant. A broker
and its registered representatives have a duty to provide an exchange free
from fraud but they do not have a duty to put the client's interests ahead
of their own when making investment recommendations.
Investment Advisor: An investment advisor (RIA)
and its representatives are fiduciaries. As such, they have a duty to put
the client's interests ahead of their own when making investment
recommendations or decisions.
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