Trustees and legal counsel are sometimes confused regarding the extent to which an investment advisory firm will act in a fiduciary capacity when accepting delegation of investment matters. Although the Investment Advisors Act of 1940 provides that the advisor must act as a fiduciary, it is an unwarranted leap of logic to assume that all advisory firms provide conflict-free services at a level of care skill and caution demanded from a fiduciary. Investment Advisory Services Agreements often contain contractual provisions which opt the parties out of the default prudence standards embodied in state Prudent Investor statutes. This places trustees in a true caveat emptor situation.

The implications of opportunistic market behaviors on the part of many Registered Investment Advisory firms may be profound. Trustees fashioning request for proposals for advisory services often fail to include probing questions into the advisor’s practices. Trustee monitoring and evaluation of advisor candidates may lack the requisite insight to assure that the proposed services are conflict free and in the best interest of trust beneficiaries. The ‘Hybrid Practice Model’ in which some services are performed in an Advisory capacity while others are discharged in a Broker-Dealer capacity is especially troubling.

A brief essay on this topic appears in the PDF file below. The essay explores the nature and scope of the problem and provides a brief sample case derived from several fiduciary litigation cases in which the author participated.