The fiduciary duty of investment advisers

Under the Investment Advisers Act, every investment adviser is a fiduciary to its clients, and owes each of them a duty of care and a duty of loyalty. Together they require the adviser to act in the client's best interest at all times and never to place its own interests ahead of the client's.

The duty is not written out in a rule. It comes from Section 206 of the Advisers Act as the Supreme Court read it in SEC v. Capital Gains Research Bureau (1963). The Commission set out its own reading in one place in the Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release IA-5248, issued on 5 June 2019 and published at 84 FR 33669 on 12 July 2019. That release is the reference examiners work from, and this guide follows its structure.

Who owes the duty

Because the duty arises under Section 206, which reaches every adviser, the release says the interpretation applies to SEC-registered advisers, state-registered advisers, and advisers that are exempt from or prohibited from SEC registration. Section 206 is not limited to securities transactions: it covers the whole relationship.

The release does not take a position on any fiduciary duty that applies under state law. ERISA and other statutes can add duties of their own for particular clients.

The duty follows the relationship, but cannot be waived

The fiduciary duty applies to the entire relationship, and its specific obligations depend on what the adviser agreed to do. An adviser running a discretionary portfolio for a retail client owes far more than one hired to manage a fixed income sleeve within tight guidelines. The adviser and client may shape the scope of the relationship by agreement, provided there is full and fair disclosure and informed consent.

What they cannot do is waive the duty itself. The release gives three examples of provisions that would be inconsistent with the Advisers Act, whatever the client's sophistication:

• a statement that the adviser will not act as a fiduciary
• a blanket waiver of all conflicts of interest
• a waiver of any specific obligation under the Advisers Act

Hedge clauses. The release withdrew the 2007 Heitman staff no-action letter and said there are few, if any, circumstances in which a hedge clause in a retail client agreement would be consistent with the antifraud provisions, where it purports to relieve the adviser of liability for conduct as to which the client has a non-waivable cause of action. For institutional clients it depends on the facts.

The duty of care

The release describes three parts.

1. Advice in the client's best interest

The adviser must have a reasonable understanding of the client's objectives and a reasonable belief that its advice is in the client's best interest based on them.

• For retail clients, that means at a minimum a reasonable inquiry into the client's financial situation, financial sophistication, investment experience and financial goals, which the release calls the "investment profile." A comprehensive financial plan generally needs more: income, investments, assets and debts, marital status, tax status, insurance and goals.
• Updating. In an ongoing relationship the adviser generally needs to update the profile and adjust its advice when circumstances change. The frequency depends on the facts. The release gives retirement, a change in marital status and a change in tax law as examples that could require a new inquiry.
• For institutional clients, the inquiry is shaped by the mandate. A bond manager needs to understand the client's objectives for the bond portfolio, not its entire balance sheet.
• Reasonable investigation. The adviser must investigate an investment enough not to base advice on materially inaccurate or incomplete information.
• Cost matters but is not the test. Cost is one of many factors. The duty does not require recommending the lowest cost option, and recommending the cheapest option without further analysis does not satisfy it either.
• Riskier products need more scrutiny. For retail clients the release calls for heightened scrutiny of high-risk products such as penny stocks, and says leveraged and inverse exchange-traded products may not be in a retail client's best interest absent a short-term, client-specific objective, and would need daily monitoring if they are.
• Account type and rollovers. The duty covers advice about which type of account to use and whether to roll assets over, for example from a retirement plan into an account the adviser manages.

2. Best execution

Where the adviser selects the broker-dealers that execute client trades, it must seek the most favorable total cost or proceeds for the client under the circumstances. The release quotes the Commission's long-standing position that the determinative factor is not the lowest commission but "the best qualitative execution," taking into account the full range and quality of a broker's services, and that advisers should "periodically and systematically" evaluate the execution clients receive.

3. Advice and monitoring over the relationship

The adviser must provide advice and monitoring at a frequency in the client's best interest, given the scope of the relationship. An ongoing relationship paid by a periodic asset-based fee carries a relatively extensive duty to monitor. A one-time financial plan for a one-time fee generally does not, absent an agreement. Where the adviser has an ongoing relationship, monitoring includes whether the client's account or program type, such as a wrap account, continues to be in its best interest.

The duty of loyalty

The duty of loyalty requires that the adviser not subordinate its clients' interests to its own. In practice it has three parts.

Full and fair disclosure of all material facts about the relationship, including the capacity in which the firm is acting. This matters most for dual registrants, who should explain when they act as broker and when as adviser.

Eliminate or expose conflicts. The adviser must eliminate, or at least expose through full and fair disclosure, all conflicts of interest that might incline it, "consciously or unconsciously," to give advice that is not disinterested. The release is specific about what full and fair means:

• Disclosure must be specific enough that the client can understand the conflict and decide whether to consent.
• Saying the adviser has "other clients" or "conflicts" without describing them is inadequate.
• Saying the adviser "may" have a conflict is inadequate when the conflict actually exists. "May" is appropriate only for a conflict that does not exist now but might reasonably arise.
• The level of detail can differ between retail and institutional clients, but in every case it must be enough for an informed decision.

Informed consent. Consent can be explicit or, depending on the facts, implicit, for example by entering into or continuing the relationship after receiving Form ADV. The adviser does not have to confirm that each client understood. But it may not infer consent where it knew, or reasonably should have known, that the client did not understand the conflict. Where a conflict cannot be disclosed clearly enough for a client to consent, the adviser should eliminate it or mitigate it until it can.

Disclosure is not the whole duty. The release is explicit that full and fair disclosure and informed consent stop a conflict from itself being a breach, but do not by themselves satisfy the duty to act in the client's best interest. A disclosed conflict still cannot be used to give advice that is not in the client's interest.

Allocation. When allocating investment opportunities, an adviser need not use pro rata allocation or any particular method, but it must disclose its allocation practices fully and fairly, and they must not prevent it from giving advice in each client's best interest.

How the duty is enforced

The duty is enforceable through Section 206. The release notes that claims under Section 206(1) require scienter, while claims under Section 206(2) can rest on simple negligence, citing Robare Group v. SEC (D.C. Cir. 2019). An adviser can breach its fiduciary duty without intending to mislead anyone.

Where the duty shows up in the rules

• Form ADV Part 2A, the brochure, sets minimum disclosures, including conflicts, and is delivered under Rule 204-3 before or at the time of the advisory contract.
• Form CRS, adopted in the same June 2019 package (Release IA-5247), summarizes conflicts for retail investors in plain English.
• Rule 204A-1 requires the code of ethics to set a standard of business conduct that reflects the firm's fiduciary obligations.
• Rule 206(4)-7 requires written policies reasonably designed to prevent violations of the Act. The release suggests advisers consider whether policies on monitoring would be appropriate under it.

The Division of Examinations named fiduciary duty and standards of conduct among its core areas for advisers in its fiscal year 2026 priorities.

What examiners look for

Each part of the interpretation becomes a question an examiner can put to the file:

• Are conflicts the firm actually has, such as revenue sharing or affiliated products, disclosed as facts rather than as things that "may" happen?
• Does the brochure describe the business as it is now? Conflicts disclosed in a brochure nobody updated when the conflict changed are a recurring problem.
• Is there a record of the analysis behind rollover and account type recommendations?
• Were client profiles updated in long relationships, or after events such as retirement?
• Where the firm chooses brokers, is there a periodic review of execution quality?
• Do advisory agreements contain hedge clauses or broad waivers?
• Were principal trades disclosed and consented to before completion, as Section 206(3) requires, rather than papered afterwards?

Common questions

Are all investment advisers fiduciaries?

Yes. The fiduciary duty arises under Section 206 of the Advisers Act, which applies to every adviser. The Commission's 2019 interpretation states that it applies to SEC-registered and state-registered advisers and to advisers exempt from SEC registration.

Can a client waive an adviser's fiduciary duty?

No. The scope of the relationship can be shaped by agreement with full and fair disclosure and informed consent, but the duty itself cannot be waived. A statement that the adviser is not a fiduciary, a blanket conflict waiver, or a waiver of a specific Advisers Act obligation is inconsistent with the Act regardless of the client's sophistication.

Is disclosing a conflict enough to satisfy fiduciary duty?

Not on its own. Full and fair disclosure with informed consent means the conflict itself is not a breach, but the adviser must still give advice in the client's best interest. Where a conflict cannot be explained clearly enough to consent to, it should be eliminated or mitigated.

Does fiduciary duty mean recommending the cheapest investment?

No. Cost is one important factor among many, including objectives, risks, liquidity and the rest of the client's portfolio. A higher-cost option can be in the client's best interest if other factors outweigh cost, and the lowest cost option is not automatically the right one.

What is the difference between the duty of care and the duty of loyalty?

The duty of care is about the quality of the advice: understanding the client, investigating investments, seeking best execution and monitoring. The duty of loyalty is about whose interests come first: disclosing material facts and conflicts and not putting the adviser's interest ahead of the client's.

Turn the duty into a record

A fiduciary duty is tested by what the firm can show. Luna's compliance manual template sets out policies for conflicts, client profiles and monitoring, and the trading and best execution policy template covers broker selection and periodic execution review. For the disclosure documents themselves, see the guides to Form ADV Part 2 brochures and Form CRS.