Series 65

By Investopedia AAA

Conflicts of Interest - Anti-fraud provisions and fiduciary duties

The anti-fraud provisions of the Investment Advisers Act of 1940 and Uniform Securities Act impose a duty on IAs to act as fiduciaries in dealing with clients and prohibit fraudulent behavior without exception. As the Securities and Exchange Commission states, advisers "have an affirmative obligation of utmost good faith and full and fair disclosure of all material facts to their clients, as well as a duty to avoid misleading them."

A fiduciary is required to act in the best interests of the person he or she is working with. Trustees, pension administrators, custodians and investment advisers are all prohibited from engaging in any fraudulent, deceptive or manipulative behaviors when working with beneficiaries or clients.

When working with clients, investment advisers and investment adviser representatives have a much stronger fiduciary responsibility than broker-dealers and their registered representatives.

Under the Investment Advisers Act of 1940, the IA's obligations under the fiduciary role include:

  • The duty to be loyal to the client
  • The duty to have a reasonable and objective basis for investment recommendations
  • The duty to make sure that any investment recommendations are appropriate considering the client's financial objectives, needs and situation
  • The duty to ensure best execution for securities transactions, if the IA can direct such transactions


Look Out!
The IA\'s primary fiduciary obligation is to put the client\'s (or beneficiary\'s) needs before his or her own. When faced with a question on this topic, answers such as "ensuring the account does not lose money" or "investing in a fund desired by the trustee" are incorrect, since performance guarantees are prohibited and the IA\'s obligation is to the beneficiary, not the trustee.

Other Prohibited Behaviors
Related Articles
  1. Charles Schwab saw a huge return on his investment in the small-investor market. Today, he serves as executive chairman and largest shareholder of his namesake brokerage, which oversees 9.3 million client accounts.
    Investing News

    How Much Money Does Charles Schwab Have?

  2. In 2014, stock markets traded at record levels and the US IPO market enjoyed activity not seen since the 2000 tech bubble. Here is a snapshot of some of the year’s most successful IPOs.
    Investing News

    5 IPOs That Broke The Markets In 2014

  3. Investing

    The Increasing Importance Of The Reserve ...

  4. Trading Strategies

    Steps To Becoming A Quant Trader

  5. Stock Analysis

    New Data Runs Counter - Ahead of Wall ...

Trading Center