Scott Curtis, president of Raymond James Financial Services, raised an interesting question when he stated in an AdvisorOne interview that while he supports the fiduciary “concept,” he cannot support the fiduciary standard because the standard “hasn’t been defined to the FA level.”
This is a curious remark as the principle-based fiduciary standard has been articulated through seventy years of court cases and SEC opinions—as a principle-based standard. Take the example, as Scott Curtis does, of the issue of conflicts of interest.
What does the Investment Advisers Act require when a material conflict cannot be avoided and must be managed in the client’s best interest? Curtis notes the conflict must be disclosed to the client, but disclosure alone is insufficient. There is more. A material conflict puts a greater duty on the advisor. The advisor must also receive informed consent from the investor: i. e.: consent that is intelligent and independent. This consent means the investor understands the nature of the conflict and the actual or potential harm it might pose. Finally, the advisor should only proceed with the transaction if he or she can mitigate or manage the conflict to be able to determine the transaction is in the best interest of the investor.
This duty is articulated in the SEC Arlene Hughes case, and two points deserve special mention. First, the advisor is responsible for ensuring the investors’ best interest is upheld. The SEC was explicit in noting that it is the investment advisor who is held accountable for assuring that his or her client understands the nature of the conflict and the risk or harm that it imposes. On this point there is no ambiguity.