“Fiduciary” Isn’t Enough

“Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. One cannot change this all in a moment, but one can at least change one's own habits.”

-- George Orwell, Politics and the English Language

The recently implemented Department of Labor standard, under which all providers of investment advice to ERISA retirement plans are designated as fiduciaries, has increased awareness amongst the public and plan sponsor universe that not all providers of investment “advice” have a client’s best interests at heart.

The word “fiduciary” has leapt from legal esoterica into the common parlance, but in the transition it has become misunderstood. While it would be tempting to take the presence or absence of a single descriptive word to determine whether an investment advisor places client interests first, a single word is not sufficient. While we believe that no client should take advice from any party that is not a fiduciary for that advice, “fiduciary” isn’t enough.

To understand why, we must first delve into some competing definitions of the word “fiduciary.”

The Common Definition:

“A person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty.”

Source: Law.com (emphasis added)

This definition is simple and straightforward. “Total trust, good faith, and honesty” leaves no room for interpretation. Under this common definition, serving as a fiduciary for someone else means behaving absolutely in the other person’s best interest. Period.

This is, broadly, the standard that institutional clients – trustees of nonprofit organizations, members of committees overseeing retirement plans, etc. – are held to in oversight of those portfolios.

If the client sponsors an ERISA pension or benefit plan, the standard is even more explicit. The Employee Retirement Income Security Act (ERISA) defines the word “fiduciary” more comprehensively:

The ERISA Definition:

“A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and –
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III of this chapter.”

Source: The Employee Retirement Income Security Act (ERISA)

This is a strong standard. It requires that fiduciaries to an ERISA-governed plan place the interests of the plan’s participants and beneficiaries first and foremost, pay only reasonable expenses in the management of the plan, and act with high degree of competence when overseeing it. It leaves no wiggle room around these requirements.

Both of these definitions of the word “fiduciary” are considerably stronger than the one to which the Securities and Exchange Commission holds Registered Investment Advisers.

The Securities & Exchange Commission’s Definition:

“As an investment adviser, you are a ‘fiduciary’ to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client. … You must eliminate, or at least disclose, all conflicts of interest that might incline you — consciously or unconsciously — to render advice that is not disinterested. … If you do not avoid a conflict of interest that could impact the impartiality of your advice, you must make full and frank disclosure of the conflict.”

Source: The SEC (emphasis added)

This is the definition of “fiduciary” that applies to investment advisors who provide investment advice (as distinct from sales of investment products), and register with the SEC as Investment Advisers under the Investment Advisers Act of 1940.

Note the SEC’s emphasis on disclosure. The SEC does want investment advisors to put client interests first, but according to its definition, that aim is accomplished if the advisor adequately discloses all the ways that it doesn’t.

This odd definition creates the problem. While the people and organizations overseeing institutional portfolios – Board members, staff members, companies sponsoring retirement plans, etc. – are fiduciaries to the portfolios and institutions they oversee under the first or second definitions of the word, the investment advisors they hire are typically fiduciaries under the third definition. (We are leaving aside the very important question of whether the “advisor” chooses to be a Registered Investment Advisor and uphold even the SEC’s definition of “fiduciary.”)

This wouldn’t be a problem if the word “fiduciary” had common meaning. But the SEC’s definition of the word “fiduciary” (the one applied to investment advisors) is considerably weaker than the common-law definition of the word (which applies to the clients themselves).

Clients are fiduciaries in the strong sense of the word; advisors (if they are Registered Investment Advisors) are fiduciaries in the weak sense of the word. Clients can’t simply disclose away a conflict of interest that renders them less than totally impartial in fulfilling their duties. They shouldn’t hire an advisor to help them discharge this responsibility, if the advisor they are hiring isn’t held to the same standard.

Sellwood’s Definition of “Fiduciary”:

Sellwood Consulting is a Registered Investment Advisor, registered with the SEC. While we believe that the only advice worth taking is that which comes from a fiduciary, we also believe that the SEC’s definition of the word is inadequate to ensure that advice to clients is unbiased and undertaken with their interests first and foremost. So, we define “fiduciary” a fourth way:

  1. Eliminate, rather than disclose, all conflicts of interest.
  2. Operate culturally as fiduciaries, in writing, for all services & for all clients.
  3. Offer only one line of business: institutional investment advice.
  4. Treat client assets as if they were our own.
  5. Make every recommendation or portfolio decision in the client’s best interest.
  6. Pursue highly rigorous professional education & certification.
  7. Implement the highest-quality investment programs possible.
  8. Implement investment programs at the lowest possible cost.

Sellwood’s definition is much closer to the first and second definitions of the word, above. It is therefore closer to the standard that our clients are held to in fulfillment of their important duties. When we help clients discharge their fiduciary responsibilities, we are behaving fully as fiduciaries in the same sense that they are.

There is no word for this type of fiduciary. We may have to settle for “Fiduciary, for Real,” or “Old School Fiduciary.” It doesn’t roll off the tongue.

Client Implications: Count the Disclosures

As important as it is to consider the definition of the word “fiduciary,” it’s equally important to examine the word that typically comes next. It’s not a fiduciary rule; it’s a fiduciary standard. Being a fiduciary shouldn’t mean adhering to a set of externally imposed limitations or constraints on behavior. It shouldn’t be something that can be turned on or off, depending on the client or service performed. It should mean, instead, upholding a standard for professionalism and ethics that places client interests before the advisor’s, at all times and for all clients. Culturally and permanently, not optionally or just when the regulators require it.

It is unfortunate that the word “fiduciary” means so many different things. If we had a shared definition of the word, it would serve as a useful shorthand for evaluating whether an investment advisor operates in a culture of placing client interests first. Without that shared definition, we propose a different rule of thumb: count the disclosures.

The SEC’s definition of “fiduciary” requires that the advisory firm “eliminate, or at least disclose, all conflicts of interest that might incline [the firm] to render advice that is not disinterested.” It stands to reason, therefore, that the number of disclosures in a firm’s ADV filing, marketing materials, and Advisory Agreement is a rough proxy for how many conflicts of interest the advisor would have in serving a client, even as “fiduciaries” as defined by the SEC. Count these words, which are typically in eight-point font and written by lawyers. They are all there because they have to be, not because the advisor wants them to be.


The word “fiduciary” means too many things, leaving open the possibility that clients are held to stricter standards than their advisors are, in oversight of their portfolios. These differences are meaningful: the Department of Labor estimates that conflicts of interest between investment advice providers and their clients cost investors $17 billion every year – and this is only counting retirement savers.

Nobody should take investment advice from any party that is not a fiduciary for that advice, in writing. But it remains the case that an investment advisor can call itself a fiduciary while operating with meaningful conflicts of interest that impair the advice it delivers to clients, as long as those conflicts are disclosed. Clients don’t have an option to disclose away conflicts, so they should insist on a higher standard of their advisors.

Disclosure is no substitute for elimination of conflicts of interest. “Fiduciary” isn’t enough.