What Is Fiduciary Duty?
Fiduciary duty is the legal obligation requiring investment advisers to act in the best interest of their clients at all times.
- Applies to all investment advisers and IARs
- Consists of duty of care and duty of loyalty
- Cannot be waived by contract or client consent
When you pass the Series 65 and become an investment adviser representative, you take on fiduciary responsibility to your clients. This is the highest standard of care in the financial services industry. It means you must always put your clientsâ interests ahead of your own.
The SEC defines fiduciary duty through two core components: duty of care and duty of loyalty. Understanding both is essential because the Series 65 exam tests your ability to apply these concepts to real-world scenarios.
Fiduciary duty flows from the Investment Advisers Act of 1940, which governs investment advisers at the federal level. The SEC has clarified that this duty applies to the entire relationship between the adviser and client, not just at specific moments when recommendations are made.
Fiduciary duty is what distinguishes investment advisers from broker-dealers. When clients work with an IAR, they receive advice from someone legally bound to prioritize their interests. This obligation is the foundation of the trust relationship between advisers and clients.
Duty of Care
The duty of care requires investment advisers to provide advice in the best interest of the client based on the clientâs objectives. The SEC breaks this down into three specific components:
Best Interest Advice
Make a reasonable inquiry into the clientâs financial situation, investment objectives, risk tolerance, and other relevant circumstances. Then provide advice that is in the clientâs best interest based on that understanding.
Best Execution
Seek the most favorable terms reasonably available under the circumstances when executing client transactions. This includes considering price, cost, speed, and likelihood of execution. See best execution.
Ongoing Monitoring
Provide advice and monitoring throughout the advisory relationship, not just at the initial recommendation. Periodically review client accounts to ensure the strategy remains appropriate.
The three components of duty of care. Best interest advice, best execution, and ongoing monitoring. Are frequently tested on the Series 65. Our flashcard strategies guide explains how to use FSRS-powered spaced repetition to memorize these components and distinguish them from the two elements of duty of loyalty, ensuring you can quickly identify which duty applies in exam scenarios.
What âBest Interestâ Really Means
Best interest does not necessarily mean lowest cost. The SEC specifically states that an adviser would not satisfy duty of care by simply recommending the lowest cost product without further analysis.
Instead, advisers must consider multiple factors:
Cost
Fees, expenses, and compensation
Liquidity
How easily the investment can be sold
Risk
Potential for loss relative to clientâs tolerance
Benefits
Potential returns and advantages
Volatility
Price fluctuation characteristics
Time Horizon
Match to clientâs investment timeline
If an exam question presents a scenario where an adviser recommends the cheapest option without considering client objectives, that likely violates duty of care. Cost is one factor among many, not the sole consideration.
Duty of Loyalty
The duty of loyalty requires investment advisers to put client interests first and not subordinate client interests to their own. The core requirement is to either eliminate conflicts of interest or provide full and fair disclosure so clients can give informed consent.
Eliminating vs. Disclosing Conflicts
When a conflict of interest exists, advisers have two options:
What âFull and Fair Disclosureâ Requires
The SEC has set a high bar for adequate disclosure. Generic or vague disclosures are not sufficient.
Insufficient Disclosure
- âWe may have conflicts of interest"
- "Conflicts may exist in certain circumstances"
- "We have other clients whose interests may differ"
- "Certain compensation arrangements may applyâ
Sufficient Disclosure
- Specific description of each conflict
- How the conflict affects client recommendations
- How the adviser will manage the conflict
- When and how the conflict will occur
While conflicts of interest can be addressed through disclosure and informed consent, duty of care cannot be satisfied by disclosure alone. An adviser cannot simply disclose that they are recommending unsuitable investments and expect client consent to make it acceptable.
Understanding that disclosure cannot cure duty of care violations is just one of many fiduciary-related traps on the Series 65. Our common mistakes guide identifies all top exam failure patterns, including the specific fiduciary duty confusions that trip up even well-prepared candidates who understand the concepts but miss the subtle distinctions in scenario questions.
Master Fiduciary vs. Suitability
The Series 65 heavily tests whether you understand the difference between fiduciary duty and the suitability standard. CertFuel tracks your accuracy on duty of care, duty of loyalty, and Reg BI questions separately, so you'll know exactly which concepts need more review before exam day.
Access Free BetaFiduciary vs. Suitability Standard
One of the most heavily tested distinctions on the Series 65 is the difference between the fiduciary standard (investment advisers) and the suitability standard (broker-dealers). Understanding this difference is crucial.
| Aspect | Fiduciary Standard | Suitability Standard |
|---|---|---|
| Applies To | Investment Advisers and IARs | Broker-Dealers and Registered Reps |
| Primary Obligation | Must act in clientâs best interest | Recommendations must be âsuitableâ |
| Duration | Ongoing throughout the relationship | Point-in-time when recommendation is made |
| Conflict Handling | Must eliminate or disclose with informed consent | Not required to disclose conflicts |
| Client Priority | Must put client interests first | Not required to prioritize client over firm |
| Governing Law | Investment Advisers Act of 1940 | FINRA Rules (formerly NASD) |
The Practical Difference
Under the suitability standard, a broker-dealer can recommend a more expensive product that pays higher commissions, as long as the product is âsuitableâ for the client. The broker is not required to recommend the best option, only an acceptable one.
Under the fiduciary standard, the investment adviser must consider whether recommending the more expensive product is truly in the clientâs best interest. If a less expensive option would better serve the client, the fiduciary duty may require recommending it.
The fiduciary standard sets a higher bar than suitability
The distinction between fiduciary and suitability standards is one of the most heavily tested concepts on the Series 65. Our flashcard strategies guide provides techniques for memorizing the six key differences (who, what, when, conflicts, priority, and governing law), using FSRS algorithms to ensure you can instantly distinguish between the two standards in exam scenarios.
Fiduciary Duty Cannot Be Waived
One of the most important concepts for the Series 65 exam: fiduciary duty cannot be waived. The SEC has made this explicitly clear in its interpretation of the Investment Advisers Act.
What Cannot Be Waived
What CAN Be Modified
While the core fiduciary duty cannot be waived, the scope of the advisory relationship can be shaped by agreement between adviser and client:
Scope of Services
Agreement to provide advice on specific asset classes or account types only
Monitoring Frequency
Agreement to review accounts quarterly rather than continuously
Specific Conflicts
Client consent to specific, disclosed conflicts of interest
Even sophisticated institutional investors cannot waive fiduciary duty. While the application of fiduciary duty may differ based on client type, the core obligation remains for all advisory relationships.
Regulation Best Interest (Reg BI)
In 2020, the SEC implemented Regulation Best Interest (Reg BI), which enhanced the standard for broker-dealers. The Series 65 exam now tests your understanding of how Reg BI differs from fiduciary duty.
What Reg BI Requires
Reg BI requires broker-dealers to act in the âbest interestâ of retail customers when making recommendations. This is higher than the old suitability standard but still different from fiduciary duty.
Disclosure Obligation
Provide information about the relationship, fees, and conflicts of interest
Care Obligation
Exercise reasonable diligence and prudence when making recommendations
Conflict of Interest Obligation
Establish policies to identify and mitigate conflicts
Compliance Obligation
Implement policies and procedures to achieve compliance
Reg BI vs. Fiduciary Duty
Remember: Reg BI does NOT make broker-dealers fiduciaries. If an exam question asks whether a broker-dealer has fiduciary duty after Reg BI, the answer is no (unless they are dually registered and acting in an advisory capacity).
Series 65 Exam Tips: Fiduciary Duty
Fiduciary duty is tested throughout the Series 65 exam, particularly in Section IV (Laws, Regulations, and Guidelines). Here is what to focus on:
High-Priority Concepts
Two components
Duty of care (best interest advice, best execution, monitoring) and duty of loyalty (eliminate or disclose conflicts)
Cannot be waived
No contract, client sophistication, or consent can eliminate fiduciary status
Ongoing duty
Applies throughout the relationship, not just at recommendation time
Fiduciary vs. Suitability
Investment advisers = fiduciary, broker-dealers = Reg BI/suitability
Disclosure requirements
Must be specific and detailed, not generic âconflicts may existâ language
Common Exam Scenarios
- Adviser recommends expensive product: Is it in the clientâs best interest, or does higher compensation influence the recommendation?
- Client signs waiver: Does not eliminate fiduciary duty. The waiver is void under the Advisers Act.
- Dual registration: When acting as investment adviser = fiduciary. When acting as broker-dealer = Reg BI.
- Institutional client: Still entitled to fiduciary duty, though application may differ.
- Best interest vs. Lowest cost: Best interest considers multiple factors, not just cost.
Question Analysis Strategy
Identify the role
Identify if the person is an investment adviser/IAR (fiduciary) or broker-dealer/rep (Reg BI)
Check for best interest
Ask: Is the action in the clientâs best interest or the adviserâs interest?
Verify disclosure
Check: Were conflicts properly disclosed with sufficient detail?
Remember the limit
Remember: Disclosure cannot cure duty of care violations
If a scenario involves an investment adviser and the action prioritizes the adviserâs interests over the clientâs, it almost certainly violates fiduciary duty. The fiduciary standard means always putting clients first.
Fiduciary duty appears throughout Section IV of the exam and connects to many other topics including ethics, prohibited practices, and adviser registration. Our study schedule guide shows how to systematically prepare for fiduciary duty questions while integrating this material with the other three exam sections, ensuring youâre ready to apply these principles in any scenario the exam presents.
For more on prohibited practices that violate fiduciary duty, see our guide on ethics and prohibited practices. For a broader overview of exam topics, explore the exam topics hub.