"Investment advisors are bound to a fiduciary standard that was established as part of the Investment Advisors Act of 1940. They can be regulated by the SEC or state securities regulators, both of which hold advisors to a fiduciary standard that requires them to put their client's interests above their own.

 

The act is pretty specific in defining what a fiduciary means, and it stipulates that an advisor must place his or her interests below that of the client.

 

It consists of a duty of loyalty and care, and simply means that the advisor must act in the best interest of his or her client. For example, the advisor cannot buy securities for his or her account prior to buying them for a client, and is prohibited from making trades that may result in higher commissions for the advisor or his or her investment firm. (To learn more, see The Rise Of The Modern Investment Bank.)

 

It also means that the advisor must do his or her best to make sure investment advice is made using accurate and complete information, or basically, that the analysis is thorough and as accurate as possible.

 

Avoiding conflicts of interest is important when acting as a fiduciary, and it means that an advisor must disclose any potential conflicts to placing the client's interests ahead of the advisor's. Additionally, the advisor needs to place trades under a 'best execution' standard, meaning he or she must strive to trade securities with the best combination of low cost and efficient execution. (For more, read Meeting Your Fiduciary Responsibility.)"