Fiduciary duty: why it matters when choosing a financial adviser

When it comes to finance, anyone making decisions about another person’s money, such as a bank, wealth manager, or financial adviser, has a fiduciary duty and this means that they must act in the best interests of their client.

The  Financial Conduct Authority, which regulates all practicing financial advisers, has outlined industry standards that must be maintained and for that reason, anyone seeking a financial adviser, should always choose a firm that is FCA accredited.

What is fiduciary duty in the UK?

In 2021, the FCA announced that they wouldn’t be following the legally binding USA approach to fiduciary standards, but set out their own terms of Consumer Duty that all financial advisers should follow in order to protect consumers. They stipulate that all financial advisers and firms should:

  • Treat their clients in the same way they would their family and friends
  • Act with the aim of getting the best outcome for their clients
  • Give their clients all the information they need to make sound financial decisions
  • Avoid and disclose any conflicts of interest
  • Act in good faith and provide all the relevant facts to the client

Again, these aren’t legal requirements, they are more a code of behaviour, but if the FCA finds that there has been a breach of fiduciary duty, they can take action.

An example of a financial adviser acting in a way that is best for clients would be choosing products and strategies that are likely to generate the best return for the client rather than earn the most fees for the financial adviser’s company. 

Every client is different. Some are very sophisticated and knowledgeable in finance and investments while others may not have an understanding of financial markets at all. In all cases, it’s the duty of the adviser to provide them with all the information they think the client would need in order to understand the work that the adviser will be carrying out. 

In order to uphold their fiduciary duty any financial adviser should get to know their clients, to ensure that they have a clear view of their financial situation, and understand their requirements and the levels of risk they are comfortable with.

At PMW our adviser would always have an initial meeting with a person to talk through their finances, outline what we could do to help, and explain the associated fees. The client has to feel that this is a person they trust and want to work with. It’s like choosing a lawyer or any other professional who is required to act in your best interests.

A lot of our clients have been with us for a long time as the company has a heritage of over 50 years. That trust element has built up over time and as a result clients often refer other family members.. We also hold seminars on specific financial topics, so that you can come along and meet us to decide if we’re the firm for you. A financial adviser might sound great on paper, but you have to click with them. You might be working with them for the next 40 years!

PMW generates a lot of paperwork for clients detailing forecasts of what is likely to happen in the financial markets, in-depth analysis of the stock markets, etc. These are realistic predictions based on evidence and that’s key. If your financial adviser isn’t providing that, then this may be a sign that they won’t achieve what they promised.

Breach of fiduciary duty

There are always horror stories about financial advisers and other professions, embezzling money or charging extortionate fees or you hear about companies where clients get poor outcomes. Of course, coming across individuals like this is everyone’s greatest fear, but you can alleviate any concerns by visiting the FCA’s Firms To Avoid list, which is updated regularly.

Trustee fiduciary duty

If you are appointed a trustee, you would take on fiduciary duty, but that wouldn’t be directly linked to the FCA which regulates the financial services industry as only financial advisers, wealth managers, etc are held to account when it comes to adhering to their terms. 

What is the fiduciary duty of a charity trustee? 

A trustee of a charity has a duty to do the following:

  • Act in the charity’s best interests
  • Manage the charity’s resources responsibly – this means, making sure the assets are used to carry out the charity’s purpose and that assets are not exposed to undue risk
  • Take care when investing or borrowing
  • Act with reasonable care and skill
  • Ensure the charity is accountable

The Charity Commission appreciates that many trustees are volunteers and law on the whole, protects anyone who has acted in an honest and reasonable way.

The fiduciary duty of directors

Company directors also have a fiduciary duty and if it is felt that there has been a breach, shareholders, creditors, and the remaining directors, can start proceedings against them under the Companies Act 2006. In some cases directors can be held personally liable for any compensation payments.

What’s the difference between a breach of trust and breach of fiduciary duty?

A breach of fiduciary duty can be made by anyone who is acting for a trust, for example, a solicitor or accountant, and not just by the trustees.

A breach of trust is a breach of duty imposed on a trustee by law (for example statute, case law or the trust document). It is an act by a trustee that is either illegal or goes against the terms of the trust. For example, the trustee may have given assets to a beneficiary who isn’t entitled to them or invested the trust fund in a manner that is not permitted. 

Fiduciary duties in summary

All financial advisers have a fiduciary duty. Those who are regulated by the FCA must follow the body’s Consumer Duty terms. They pledge to act ‘swiftly and assertively’ with possible disciplinary actions in particularly harmful cases.