Fiduciary Duty

The principles of fiduciary law have been around since the Romans. Chinese, Japanese, and British law incorporated these ideas. Even Judaic, Christian and Islamic scriptures address these principles. Today, fiduciary rules are prevalent in many areas of American law including employment, banking, and medical.

The concept of being a good fiduciary is rooted in the belief that a well-functioning society needs collaboration and specialization. We can be self-sufficient to a certain extent, but we often benefit from the special talents of others. As examples, we need doctors for medical treatment, lawyers for law advice and financial advisers for financial advice. The relationship between the provider of the expert service and the recipient implies a duty of care. Moreover, the provider has an implicit obligation to act in the best interests of the recipient, or client.

By now, I guess you’re wondering where this blog post is going. Well, last Wednesday one of our team came into my office and asked, “did you see the lawsuit brought against the banks?”. She went on to report that various banks have been accused of breaching their fiduciary duties to their clients. The suit alleges these financial institutions steered idle client cash balances via their “sweep” funds into their affiliated banks to obtain cheaper sources of capital. Before the Fed started raising rates, the difference between the “sweep” rate and interest earned on a money market fund was immaterial. Now, with Fed policy at 5.25-5.50 and typical industry bank “sweep” accounts paying 0.40-0.50%, there is a material difference. It will be interesting to see how the plaintiffs argue their claim. I expect the defendants will rely on the fact that their approach is disclosed in the fine print of their client contracts.

In our role as fiduciaries, we have sought to be very diligent in investing client cash balances in money market funds or short-term treasuries, except for a float that is required to meet actual cash needs. We are not alone. Since the Fed started increasing rates in late 2022, billions of dollars have left the banking system in search of higher yields. Yet, some investors must have been caught by the “sweep” trap probably because they, or their financial advisors, were not paying attention.

One positive recent development is that the awareness of the fiduciary duty of financial advisors is growing.  The TV advertising for Fisher Investments has probably helped too. The ads assert that Fisher puts its clients’ interest first and imply that other investment advisers have more transactional instincts.

We hold ourselves to the fiduciary standard of course but we also follow its close cousin, the golden rule. It is central to our culture that we should treat our neighbor in the way we would like our neighbor to treat us. Regulation and corporate governance certainly have contractual and legal requirements, but we believe the approach to meeting these requirements must be built on simply being good people as we build trust and develop our relationships with clients. 

Gary B. Martin