What does the fiduciary standard require when entering into a new relationship?
The fiduciary standard requires a fiduciary to conduct a risk-return analysis based on circumstances particular to the relationship and applicable overall.
The fiduciary standard requires a fiduciary to conform the investments that come with the relationship (i.e., inception assets) to the investment objectives of the overall portfolio within a reasonable period of time.
The fiduciary standard lists certain considerations that should be considered in making investment management decisions. It requires that the fiduciary exercise reasonable care, skill, and caution in making investments. In addition, a fiduciary should diversify investments unless under the circumstances it is prudent not to diversify.
The fiduciary standard imposes two primary obligations on a fiduciary:
- Loyalty Rule, i.e., the duty to act exclusively for the benefit of the client. It is intended to prevent self-dealing.
- Prudence is similar to a reasonableness standard, i.e., what would a reasonable person do, and has become the industry standard of care. Prudence traditionally requires avoiding speculation and maintaining a low risk, which focuses on the portfolio as a whole rather than concentrating on individual investments.