An online Master of Legal Studies program can equip you with foundational legal knowledge and practical skills to effectively fulfill fiduciary responsibilities with confidence.
Wealth management advisors and broker-dealers have a fiduciary obligation to act in their clients' best interests. This means following recommended procedures and best practices such as conflict identification, disclosures, best-interest analyses, and detailed record-keeping.
No matter your exact wealth management role, a solid legal foundation could help you better understand your fiduciary duty and rise to the challenge, ensuring that your clients are in good hands.
Key Takeaways
Working in wealth management — whether as a financial advisor, retirement plan administrator, or portfolio manager — comes with a great deal of responsibility. As a fiduciary, your decisions have a direct impact on your clients and their financial well-being, as well as their legacy and peace of mind.
With so much at stake, it is imperative for fiduciaries in wealth management to mitigate risk and fulfill their everyday responsibilities to their clients. Below, we’ll explore how to accomplish this — and how a Master of Legal Studies (M.L.S.) degree program could prepare you to fulfill your fiduciary duty with greater confidence.
Understanding Fiduciary Obligation in Wealth Management
For those working in wealth management, understanding what fiduciary duty is and what it entails is critical to protecting your clients, building a sense of trust, and guiding your everyday decision-making as a wealth management professional.
The Definition and Importance of Fiduciary Duty
Fiduciary duty refers to a legal obligation that fiduciaries have to act in the best interests of their clients at all times — rather than their own interests (or that of the company for which they work). It requires professionals to be honest and transparent in their work and to avoid conflicts of interest whenever possible.
Fiduciary duty is especially critical in wealth management because it protects clients, as well as their assets and finances. It aims to build trust between professionals and their clients while informing decision-making and preventing both legal and ethical misconduct.
Key Legal Foundations in the United States
Wealth management professionals are tasked with understanding and adhering to the key legal components of fiduciary duty, which include:
- The duty of loyalty, which requires all fiduciaries to act in their clients' best interests and prohibits any self-dealing or conflicts of interest.
- The duty of care, which compels fiduciaries to make decisions and advise their clients with the same level of care and attention they would apply to their own finances.
- The duty of good faith, which requires fiduciaries to act with transparency, integrity, and honesty in all client interactions.
Identifying Who Qualifies as a Fiduciary
So, what does it mean to be a fiduciary? Today, a fiduciary is defined as any financial professional who has a legal obligation to be transparent and honest. To minimize conflicts of interest, fiduciaries usually charge advisory fees or flat fees (as opposed to earning commissions).
Financial Advisors and Broker-Dealers
Both financial advisors and broker-dealers serve as fiduciaries, making recommendations to help clients achieve their long-term financial goals through savings, investments, and trades. Depending on whether a broker-dealer or financial advisor has a discretionary or non-discretionary arrangement with a client, they may be able to make investment decisions on their behalf without requiring explicit permission.
Retirement Plan Administrators and Trustees
Retirement plan administrators and trustees serve as fiduciaries who help their clients achieve their retirement saving goals. These professionals may handle everything from recommending and setting up retirement plans on a client's behalf to managing contributions and updating clients on account performance.
Core Responsibilities of Fiduciaries
The most important responsibility of a fiduciary is to put your clients' interests above your own at all times. Fiduciaries have a duty of loyalty, a duty of care, and a duty of prudence in making investment decisions.
Duty of Loyalty in Client Relationships
An important responsibility for fiduciaries is the duty of loyalty in all client relationships. This loyalty, which even supersedes any loyalty to the company for which a fiduciary may work, requires professionals to avoid conflicts of interest and keep client information confidential at all times. If conflicts do arise, these must be reported immediately.
Duty of Care and Prudence in Investment Decisions
The duty of care and prudence for fiduciaries means that they should treat their clients' investment decisions, assets, and finances with the same level of care and attention they would give their own personal finances. This means staying informed on best practices, diversifying investments to mitigate risk of loss, and taking all relevant factors into consideration when making decisions or recommendations to a client.
Types of Fiduciary Relationships in Wealth Management
Many types of fiduciary relationships can exist in wealth management, from advisor-client relationships to corporate governance and board roles. With a better understanding of what these different roles are and what they entail, you can better understand how fiduciary responsibility fits into the picture.
Advisor-Client Relationships
The majority of fiduciary relationships in wealth management fall under the category of advisor-client relationships. In these arrangements, fiduciaries may provide clients with guidance on anything from financial planning to investing, trade, and retirement savings.
Advisors in these arrangements can be either discretionary (meaning fiduciaries can make decisions on behalf of their clients) or non-discretionary, where they must get explicit permission from a client before taking any action.
Corporate Governance and Board Responsibilities
Corporate governance professionals (including senior management and board members) have an important relationship with clients — and a critical duty to align the company's overall strategy and vision with client needs.
Some important responsibilities related to fiduciary duty include:
- Overseeing risk management frameworks to mitigate investment and other financial risks.
- Ensuring that the company and its fiduciaries always comply with industry regulations.
- Maintaining a sense of transparency and clear communication between the board, clients, and fiduciaries.
Operationalizing Fiduciary Responsibility: Practical Requirements
It's one thing to read about fiduciary responsibility and duty as an abstract concept — but what does it actually look like in action? Below are some practical tips and best practices for operationalizing fiduciary responsibility in any wealth management role.
Conflict Identification and Disclosure Procedures
Fiduciaries should have established and reliable procedures in place for identifying and disclosing potential sources of conflict. For example, if a fiduciary knows that they may have a competing interest, or if a self-dealing conflict arises, they should follow a documented process for disclosing conflicts to clients and other stakeholders. In situations where client consent is needed to move forward, ensure this is documented in writing for legal protection.
Suitability and Best-Interest Analyses
Fiduciaries should conduct suitability and best-interest analyses, which involve assessing whether an action being taken (or recommended) is in the client's best interests. These evaluations should be grounded in a clear understanding of the fiduciary’s duty of care and loyalty.
Managing and Reducing Fiduciary Risk
Risk management is another important aspect of any fiduciary's work, as part of protecting a client is taking proactive measures to mitigate financial risk. Regardless of your specific role, there are several steps you can take to manage and reduce fiduciary risk on behalf of your clients.
Ongoing Surveillance, Controls, and Recordkeeping
Careful surveillance, controls, and documentation are essential components of fiduciary risk management. In general, fiduciaries are encouraged to:
- Keep detailed records of all decisions, recommendations, and actions taken.
- Carefully track and assess the performance of client investments, making or recommending changes as needed.
- Stay on top of the latest legal and regulatory standards as they evolve, including those related to the Employee Retirement Income Security Act (ERISA).
- Take proactive measures to avoid breach of fiduciary duty through conflicts of interest or other issues.
Testing, Monitoring, and Cybersecurity Practices
Fiduciaries can mitigate risk by protecting client data through ongoing testing, monitoring, and improvement of cybersecurity practices. This includes following best practices for safeguarding client financial data, such as:
- Setting up strict access controls.
- Encrypting sensitive data.
- Having an incident response plan in place.
- Enabling multi-factor authentication for client accounts.
- Conducting regular risk assessments and addressing security vulnerabilities before they turn into breaches.
- Providing employees with proper and ongoing cybersecurity education and training.
Ongoing testing and monitoring of cybersecurity systems should also be conducted to reveal and address any potential security vulnerabilities. In doing so, fiduciaries can adhere to their duty of care, or the responsibility to treat their clients' information and assets with the same level of care with which they would handle their own.
Pursue an Online M.L.S. with a Finance Track
Serving in a fiduciary wealth management role comes with a great amount of responsibility to act in your clients' best interests at all times, adhering to the concepts of good faith and duty of loyalty. Fulfilling these responsibilities requires an in-depth understanding of the legal side of wealth management, including regulatory compliance requirements and risk management strategies.
Enrolling in an online Master of Legal Studies program could help you build the foundational legal knowledge and skills needed to serve in fiduciary roles with greater confidence. At the University of Miami School of Law, our 100% online program is offered with a dedicated M.L.S. track in finance and wealth management that includes coursework in critical topics such as regulations, compliance, data privacy/protection, and cybersecurity.
Reach out to request more information about this program today, or take the next step by filling out your application for admission.
Sources
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