Fiduciary

A fiduciary is a person other than the owner who is legally appointed and authorized to act in the stead of a beneficiary. In most cases, the fiduciary should provide documentation of his or her authority. The fiduciary initiates trades, manages the account, approves distributions and makes whatever other decisions may be necessary to maintain the fiduciary account. Investments are made in the owner's best interests, but the owner does not have legal control over them.

The fiduciary is bound by Prudent Man Rules (also known as Prudent Person Rules) - that is, he or she must make decisions that are compatible with the account's investment objectives and that are in the best interests of the beneficiary. The fiduciary may not use the account for his or her own benefit; he or she can charge a reasonable fee for services, but cannot share in the account's profits. In some states, fiduciaries are also bound by the legal list of investments permitted by the state.

Fiduciaries include but are not limited to people performing the following roles:

  • Trustee - administers a trust

  • Custodian - manages a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account (discussed below)

  • Guardian - handles an incompetent person's affairs or a minor's affairs until the minor reaches the age of majority

  • Executor - manages the affairs of an estate

  • Administrator - liquidates the estate of a person who dies without a will

  • Conservator - acts for an incompetent person

  • Receiver - handles the details of bankruptcies

Power of Attorney
To allow a person not named on an account to have trading authority, the customer must file written authorization with the broker-dealer that gives the person access to the account. The degree of access will determine whether a full or limited power of attorney is necessary.

  • Full Power of Attorney: Full power of attorney allows the non-owner of an account to make investment decisions for the account owner and to deposit and withdraw cash and securities. Trustees, guardians and custodians will often be given full power of attorney.

  • Limited Power of Attorney: A limited power of attorney grants partial, not total, control over an account. The document itself will specify the level of access accorded to the non-owner of the account.

Discretionary Accounts
Rule 2510 of the Investment Company Act of 1940 regulates discretionary accounts. A discretionary account gives trading authority to the registered representative. For the purposes of this study guide, discretion is the authority to decide what security to buy or sell, and how many units or shares will be included in the transaction. This authority is granted only after the customer has assigned written authority or a limited power of attorney with the broker-dealer. Once authorization has been approved, the rep may enter trades without consulting the account owner. The customer is legally bound to any trading decisions made by the registered representative.


Look Out!
Discretion does not refer to the timing and price of investments. If a customer asks for 100 shares of XYZ but doesn\'t specify a price, your actions are not considered discretionary if you choose only when to buy the shares and how much to pay per share.


Discretionary accounts are regulated by specific rules:

  • All discretionary orders must be identified as such at the time that a trade is executed.
  • A partner or officer of the broker-dealer must approve each discretionary trade in writing.
  • The representative may not churn the account, which means that no excessive trading - relative to the account size and the client's investment objectives - may occur.
  • With this in mind, FINRA requires the designated supervisor or manager to review all trading activity frequently to prevent excessive trading activity in the account.
Cash and Margin Accounts

Related Articles
  1. Insights

    How the New Department of Labor Rule Impacts You

    There are both positives and negatives to the new DOL rule regarding fiduciary responsibility.
  2. Financial Advisor

    Meeting Your Fiduciary Responsibility

    Being a fiduciary comes with a certain level of responsibility. These four steps will reduce your liability when managing other people's money.
  3. Personal Finance

    If An Advisor Is a Fiduciary, What Does It Mean?

    This is what it means when an advisor acts as a true fiduciary and why it matters.
  4. Retirement

    Don't Give Away Control Over Your Assets Without Planning

    Most people don't realize what they agreed to when they signed a power of attorney, and are blissfully unaware of the possible harm from poor planning.
  5. Financial Advisor

    How Much Control Should You Give Your Financial Advisor?

    Discretionary account or non-discretionary? How to tell which is best for you.
  6. Managing Wealth

    Why Keep Medical & Financial Powers of Attorney Separate?

    Representing your interests in financial matters is a very different job from communicating and advocating for your wishes with doctors.
  7. Personal Finance

    Does It Matter If My Financial Advisor is a Fiduciary?

    Should your advisor be a fiduciary? Here's what that means, and why you should ask your advisor if they already are one.
  8. Retirement

    What You Should Know About the New Fiduciary Rule

    These key questions and answers clarify the DOL's new fiduciary rule and how it impacts individual investors saving for retirement.
  9. Financial Advisor

    Coverage of Fiduciary Liability Insurance

    As fiduciaries, retirement plan sponsors have tremendous personal liability exposure. Find out how fiduciary liability insurance can protect personal assets.
  10. Financial Advisor

    Why Realtors Have Fiduciary Responsibilities

    Find out why real estate agents are considered to have a legal fiduciary responsibility to uphold the best interests of their clients.
Frequently Asked Questions
  1. What's the Best Way to Contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ...
  2. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector.
  3. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
  4. What caused the Stock Market Crash of 1929 that preceded the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ...
Trading Center