What are you really looking for in an adviser? Getting past the marketing campaigns, industry puffery, and silly nonsense; what are you truly seeking? What sort of guidance would lead to better outcomes and a better life for you?
There has been a huge dustup in Washington over the idea of imposing fiduciary duty on most financial advisors. The Dodd Frank law sought to impose it – but in a convoluted way that invited trouble. The financial services industry has lobbied very hard against it. The final outcome is unclear.
Fiduciary duty is important stuff. You wouldn’t dream of going to your lawyer, revealing all your secrets and putting your treasure into her hands, unless you had the confidence that she owed you the highest possible duty. The same level of duty, going by other names, allows you to fully trust your doctor and your clergyman. It would be folly to place all that you hold dear in the hands of someone who owed you any less care or loyalty.
Setting aside the traditional professions, though, why should it even matter? The answer depends on what you are looking for when you pay someone for advice, guidance, or help.
Fiduciary duty is the highest level of duty that the law assigns. It is understood to be, and sometimes defined as, the duty owed by a trustee. Imagine for a moment that you were handing over your property to someone else. That person would actually be taking control, and a type of ownership, over what is rightfully yours. But it is her responsibility to use that ownership for your benefit and nothing else. Very importantly, the person cannot benefit herself, either directly or indirectly, from the property you have turned over. Now ponder what level of legal duty you want that person to owe you. It would be a very high level, indeed.
The traditional legal definition of “fiduciary duty” is composed of two parts duty of loyalty and duty of care.
The duty of loyalty is the requirement to act entirely for the benefit of the one to whom the duty is owed. Sometimes this gets expressed as “putting the interests of the client before the fiduciary’s own.” I would argue that the standard is even higher than that. Rather than putting the client’s interest first, I think it is acting solely to advance the client’s interests. In this formulation, there is simply no place for any sort of conflict-of-interest. Like a trustee watching over the property of another, a fiduciary must exercise power exclusively to advance the interests of the beneficiary.
The duty of care is often stated as the requirement to act with the highest level of competence and thoroughness in accordance with standards of the profession. I prefer a more plain explanation; it is the duty to know what you are doing as a practitioner. Duty of care means that you must have the appropriate knowledge, skill, experience, and ability in doing the job properly on behalf of the client. Of course, a fiduciary must use good sense, utmost care, and best effort. It goes deeper than that, though. A surgeon who had never gone to medical school, or who had studied only psychiatry, could not meet the standard of duty of care. So too, an investment advisor who knows little about economics or finance is necessarily in breach of that duty. Knowledge, education, experience and skill are necessary to do the job correctly. One must genuinely “know what he is doing” to meet the fiduciary standard.
Ultimately, the explanation of fiduciary duty does a fine job of stating what most people want when seeking advice and guidance. They would like a level of loyalty that absolutely forbids taking advantage of them. To go even further, loyalty so strong that nothing they say or do will be used for any purpose except advancing their interests. Clearly someone paid to give this level of loyalty must totally avoid all conflicts of interest. (Merely disclosing such conflicts will not do.) In looking to a person with special skill and knowledge for help, they expect those talents to be used only to advance their own situation. After all, that superior knowledge is exactly what they are paying for.
The fiduciary duty of care is, in essence, a requirement that the practitioner actually knows what she is doing. Surely that, too, dovetails nicely with what people seek in an adviser, guide or expert. It is not too much to ask that the person we hired to lead us actually has the knowledge, training, ability, and experience to handle the job.
So we come to see that fiduciary duty is not just a legal standard. It is also an expression of common sense. When you seek expert guidance or advice, and are willing to pay a fair price for it, there are certain minimum expectations you should be entitled to hold. The first is that the provider will be on your side, not betray you, and use his talents solely to advance your cause. The second is that he will actually have all the skill, training, and talent necessary to do the job well.
In the search for advice or guidance, it turns out that “fiduciary duty” is just a fancy legal term for what you, or any reasonable person, probably want.