Specifically, understanding how advisors work in the best interests of the clients can help those clients feel that their advisor is more than a friendly face sending them reports, but a partner. In other words, instead of fiduciary duties being a stale concept of what an advisor must do, they can provide a reaffirmation of commitment by an advisor to ensure a client’s best interests are always protected.
Advisors may not have “explaining fiduciary duties” on their bingo card for easing client worries about a volatile market, but we think the unusual nature of the volatility in Spring of 2025 calls for something different. Volatile markets characterized by speed in responding to an outside force, such as international hostilities or a pandemic, isn’t new. Today’s volatility has a different landscape: investors report a lack of security. In a volatile market, one of the things nonprofessional investors say they want the most is a sense of stability. The data is in and clearly shows that many investors want to make trades. This kind of anxiety-based change underlies emotional investing. We think there are four elements of the duty of prudence that can offer clients comfort.
Most of the time, an effective approach to emotional investing can be to explain the costs on taking such moves to a client. That could include fees for trading or missed opportunities to hold stocks whose value will rebound. However, we think what investors may need, in addition to standard discussions about emotional investing, is emotional support. Specifically, understanding how advisors work in the best interests of the clients can help those clients feel that their advisor is more than a friendly face sending them reports, but a partner. In other words, instead of fiduciary duties being a stale concept of what an advisor must do, they can provide a reaffirmation of commitment by an advisor to ensure a client’s best interests are always protected.
The general concept of fiduciary includes someone who is authorized to act on behalf of another. But a fiduciary is more than a label; it carries a certain set of obligations with it. Under general legal principles, a fiduciary owes a high duty of care to the beneficiary. Fiduciaries also owe their beneficiaries a duty of loyalty. Fiduciaries must also act in good faith and act with prudence.
Prudence sounds like an old fashioned term, but in volatile markets, it is the quintessential element for trust. The duty of prudence[1] ensures that advisors act not in isolated trades, but as to the health of the whole portfolio based on a long term investment strategy. Reinforcing that advisors are duty-bound to think in the long term for clients may help them feel a sense of stability. Advisors may also want to highlight that prudence doesn’t mean a lack of flexibility. Instead, prudence requires a commitment to appropriate diversification. In plain English, this can involve an invitation to discuss diversifying asset classes. Advisors may also want to consider the financial literacy of their clients and offer client education opportunities for increasing literacy to help clients with diversification and rebalancing concerns. That duty of care usually requires that prior to acting, the fiduciary review all available information.
However, there has been a shift in understanding prudence as involving risk management beyond rebalancing. Risk management also means advisors should use their own compliance and risk management tools to protect against cybersecurity threats. Once again, clients may not need to see a detailed list of the ways their advisor works to protect against privacy threats. However, reinforcing the steps that advisors and their firms take to protect their clients’ personally identifiable information from outside attacks can help those clients feel secure.
Clients may have heard of the fiduciary duty rule. Some may even have heard about the lawsuit over the Department of Labor’s fiduciary duty rule. A deep dive into the differences between ERISA’s fiduciary duties and the SEC’s best interest rule is definitely not warranted, at least for most clients. However, clients may benefit from a brief note indicating that regardless of the current challenges to the DOL’s fiduciary duty rule, the SEC’s Regulation BI has not changed and is not under current challenge.
Advisors may find that reaffirming their partnership as a fiduciary in a newsletter to clients might be the best approach. They can follow up with clients in face to face meetings or in any client calls. Approaching this topic on social media could also help clients feel that they can rely on their advisor for their concerns. However, advisors should consult with compliance counsel before posting to ensure they are meeting all communications rules.
[1] Uniform Prudent Investor Act (1994)
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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