Fiduciary Duty Explained: What Series 65 Candidates Must Know

What Is Fiduciary Duty?

Key Concept

Fiduciary duty is the legal obligation requiring investment advisers to act in the best interest of their clients at all times.

  • Applies to all investment advisers and IARs
  • Consists of duty of care and duty of loyalty
  • Cannot be waived by contract or client consent

When you pass the Series 65 and become an investment adviser representative, you take on fiduciary responsibility to your clients. This is the highest standard of care in the financial services industry. It means you must always put your clients’ interests ahead of your own.

The SEC defines fiduciary duty through two core components: duty of care and duty of loyalty. Understanding both is essential because the Series 65 exam tests your ability to apply these concepts to real-world scenarios.

Fiduciary duty flows from the Investment Advisers Act of 1940, which governs investment advisers at the federal level. The SEC has clarified that this duty applies to the entire relationship between the adviser and client, not just at specific moments when recommendations are made.

Why This Matters

Fiduciary duty is what distinguishes investment advisers from broker-dealers. When clients work with an IAR, they receive advice from someone legally bound to prioritize their interests. This obligation is the foundation of the trust relationship between advisers and clients.

Duty of Care

The duty of care requires investment advisers to provide advice in the best interest of the client based on the client’s objectives. The SEC breaks this down into three specific components:

1

Best Interest Advice

Make a reasonable inquiry into the client’s financial situation, investment objectives, risk tolerance, and other relevant circumstances. Then provide advice that is in the client’s best interest based on that understanding.

2

Best Execution

Seek the most favorable terms reasonably available under the circumstances when executing client transactions. This includes considering price, cost, speed, and likelihood of execution. See best execution.

3

Ongoing Monitoring

Provide advice and monitoring throughout the advisory relationship, not just at the initial recommendation. Periodically review client accounts to ensure the strategy remains appropriate.

The three components of duty of care. Best interest advice, best execution, and ongoing monitoring. Are frequently tested on the Series 65. Our flashcard strategies guide explains how to use FSRS-powered spaced repetition to memorize these components and distinguish them from the two elements of duty of loyalty, ensuring you can quickly identify which duty applies in exam scenarios.

What “Best Interest” Really Means

Best interest does not necessarily mean lowest cost. The SEC specifically states that an adviser would not satisfy duty of care by simply recommending the lowest cost product without further analysis.

Instead, advisers must consider multiple factors:

Cost

Fees, expenses, and compensation

Liquidity

How easily the investment can be sold

Risk

Potential for loss relative to client’s tolerance

Benefits

Potential returns and advantages

Volatility

Price fluctuation characteristics

Time Horizon

Match to client’s investment timeline

Exam Insight

If an exam question presents a scenario where an adviser recommends the cheapest option without considering client objectives, that likely violates duty of care. Cost is one factor among many, not the sole consideration.

Duty of Loyalty

The duty of loyalty requires investment advisers to put client interests first and not subordinate client interests to their own. The core requirement is to either eliminate conflicts of interest or provide full and fair disclosure so clients can give informed consent.

Eliminating vs. Disclosing Conflicts

When a conflict of interest exists, advisers have two options:

Option 1: Eliminate the Conflict

Remove the conflict entirely so it no longer affects the adviser-client relationship. This is the cleanest approach but not always possible.

Example: Refusing to accept sales compensation from a fund company whose products you recommend.

Option 2: Full and Fair Disclosure

Provide sufficiently specific details about the conflict so the client can understand it and make an informed decision to consent.

Example: Disclosing that you receive higher compensation for recommending certain products and explaining how you manage that conflict.

What “Full and Fair Disclosure” Requires

The SEC has set a high bar for adequate disclosure. Generic or vague disclosures are not sufficient.

✗

Insufficient Disclosure

  • ”We may have conflicts of interest"
  • "Conflicts may exist in certain circumstances"
  • "We have other clients whose interests may differ"
  • "Certain compensation arrangements may apply”
✓

Sufficient Disclosure

  • Specific description of each conflict
  • How the conflict affects client recommendations
  • How the adviser will manage the conflict
  • When and how the conflict will occur
Disclosure Cannot Cure Duty of Care

While conflicts of interest can be addressed through disclosure and informed consent, duty of care cannot be satisfied by disclosure alone. An adviser cannot simply disclose that they are recommending unsuitable investments and expect client consent to make it acceptable.

Understanding that disclosure cannot cure duty of care violations is just one of many fiduciary-related traps on the Series 65. Our common mistakes guide identifies all top exam failure patterns, including the specific fiduciary duty confusions that trip up even well-prepared candidates who understand the concepts but miss the subtle distinctions in scenario questions.

đŸ”„

Master Fiduciary vs. Suitability

The Series 65 heavily tests whether you understand the difference between fiduciary duty and the suitability standard. CertFuel tracks your accuracy on duty of care, duty of loyalty, and Reg BI questions separately, so you'll know exactly which concepts need more review before exam day.

Access Free Beta

Fiduciary vs. Suitability Standard

One of the most heavily tested distinctions on the Series 65 is the difference between the fiduciary standard (investment advisers) and the suitability standard (broker-dealers). Understanding this difference is crucial.

AspectFiduciary StandardSuitability Standard
Applies ToInvestment Advisers and IARsBroker-Dealers and Registered Reps
Primary ObligationMust act in client’s best interestRecommendations must be “suitable”
DurationOngoing throughout the relationshipPoint-in-time when recommendation is made
Conflict HandlingMust eliminate or disclose with informed consentNot required to disclose conflicts
Client PriorityMust put client interests firstNot required to prioritize client over firm
Governing LawInvestment Advisers Act of 1940FINRA Rules (formerly NASD)

The Practical Difference

Under the suitability standard, a broker-dealer can recommend a more expensive product that pays higher commissions, as long as the product is “suitable” for the client. The broker is not required to recommend the best option, only an acceptable one.

Under the fiduciary standard, the investment adviser must consider whether recommending the more expensive product is truly in the client’s best interest. If a less expensive option would better serve the client, the fiduciary duty may require recommending it.

Suitability”Is this appropriate?”
Fiduciary”Is this the best for the client?”

The fiduciary standard sets a higher bar than suitability

The distinction between fiduciary and suitability standards is one of the most heavily tested concepts on the Series 65. Our flashcard strategies guide provides techniques for memorizing the six key differences (who, what, when, conflicts, priority, and governing law), using FSRS algorithms to ensure you can instantly distinguish between the two standards in exam scenarios.

Fiduciary Duty Cannot Be Waived

One of the most important concepts for the Series 65 exam: fiduciary duty cannot be waived. The SEC has made this explicitly clear in its interpretation of the Investment Advisers Act.

What Cannot Be Waived

✕Contract stating adviser will not act as a fiduciary
✕Blanket waiver of all conflicts of interest
✕Waiver of specific obligations under the Advisers Act
✕Hedge clauses purporting to relieve adviser of fiduciary status

What CAN Be Modified

While the core fiduciary duty cannot be waived, the scope of the advisory relationship can be shaped by agreement between adviser and client:

✓

Scope of Services

Agreement to provide advice on specific asset classes or account types only

✓

Monitoring Frequency

Agreement to review accounts quarterly rather than continuously

✓

Specific Conflicts

Client consent to specific, disclosed conflicts of interest

Regardless of Client Sophistication

Even sophisticated institutional investors cannot waive fiduciary duty. While the application of fiduciary duty may differ based on client type, the core obligation remains for all advisory relationships.

Regulation Best Interest (Reg BI)

In 2020, the SEC implemented Regulation Best Interest (Reg BI), which enhanced the standard for broker-dealers. The Series 65 exam now tests your understanding of how Reg BI differs from fiduciary duty.

What Reg BI Requires

Reg BI requires broker-dealers to act in the “best interest” of retail customers when making recommendations. This is higher than the old suitability standard but still different from fiduciary duty.

Disclosure Obligation

Provide information about the relationship, fees, and conflicts of interest

Care Obligation

Exercise reasonable diligence and prudence when making recommendations

Conflict of Interest Obligation

Establish policies to identify and mitigate conflicts

Compliance Obligation

Implement policies and procedures to achieve compliance

Reg BI vs. Fiduciary Duty

When it applies:
Reg BI: At time of recommendation onlyFiduciary: Throughout entire relationship
Who it applies to:
Reg BI: Broker-dealers serving retail customersFiduciary: All investment adviser clients
Ongoing monitoring:
Reg BI: Not required unless agreedFiduciary: Required throughout relationship
Exam Tip

Remember: Reg BI does NOT make broker-dealers fiduciaries. If an exam question asks whether a broker-dealer has fiduciary duty after Reg BI, the answer is no (unless they are dually registered and acting in an advisory capacity).

Series 65 Exam Tips: Fiduciary Duty

Fiduciary duty is tested throughout the Series 65 exam, particularly in Section IV (Laws, Regulations, and Guidelines). Here is what to focus on:

High-Priority Concepts

1

Two components

Duty of care (best interest advice, best execution, monitoring) and duty of loyalty (eliminate or disclose conflicts)

2

Cannot be waived

No contract, client sophistication, or consent can eliminate fiduciary status

3

Ongoing duty

Applies throughout the relationship, not just at recommendation time

4

Fiduciary vs. Suitability

Investment advisers = fiduciary, broker-dealers = Reg BI/suitability

5

Disclosure requirements

Must be specific and detailed, not generic “conflicts may exist” language

Common Exam Scenarios

  • Adviser recommends expensive product: Is it in the client’s best interest, or does higher compensation influence the recommendation?
  • Client signs waiver: Does not eliminate fiduciary duty. The waiver is void under the Advisers Act.
  • Dual registration: When acting as investment adviser = fiduciary. When acting as broker-dealer = Reg BI.
  • Institutional client: Still entitled to fiduciary duty, though application may differ.
  • Best interest vs. Lowest cost: Best interest considers multiple factors, not just cost.

Question Analysis Strategy

1

Identify the role

Identify if the person is an investment adviser/IAR (fiduciary) or broker-dealer/rep (Reg BI)

2

Check for best interest

Ask: Is the action in the client’s best interest or the adviser’s interest?

3

Verify disclosure

Check: Were conflicts properly disclosed with sufficient detail?

4

Remember the limit

Remember: Disclosure cannot cure duty of care violations

When in Doubt

If a scenario involves an investment adviser and the action prioritizes the adviser’s interests over the client’s, it almost certainly violates fiduciary duty. The fiduciary standard means always putting clients first.

Fiduciary duty appears throughout Section IV of the exam and connects to many other topics including ethics, prohibited practices, and adviser registration. Our study schedule guide shows how to systematically prepare for fiduciary duty questions while integrating this material with the other three exam sections, ensuring you’re ready to apply these principles in any scenario the exam presents.

For more on prohibited practices that violate fiduciary duty, see our guide on ethics and prohibited practices. For a broader overview of exam topics, explore the exam topics hub.

Frequently Asked Questions

Fiduciary duty is the legal obligation requiring investment advisers and their representatives (IARs) to act in the best interest of their clients at all times. It encompasses two core components: duty of care (providing suitable advice based on client objectives) and duty of loyalty (putting client interests ahead of the adviser's own interests).

Duty of care requires advisers to provide investment advice in the client's best interest, seek best execution, and provide ongoing monitoring. Duty of loyalty requires advisers to put client interests first, disclose all conflicts of interest, and not subordinate client interests to their own. Both duties must be satisfied to meet fiduciary obligations.

No. The SEC has made clear that fiduciary duty cannot be waived. Contracts cannot state that the adviser will not act as a fiduciary, provide blanket waivers of all conflicts, or waive specific obligations under the Investment Advisers Act. The scope of the relationship can be shaped by agreement, but the core fiduciary obligation remains.

The fiduciary standard requires advisers to act in the client's best interest at all times throughout the relationship. The suitability standard only requires that recommendations be appropriate at the time they are made. Fiduciary duty is ongoing and continuous, while suitability applies only at specific points in time.

No. Regulation Best Interest (Reg BI) enhances broker-dealer obligations beyond the old suitability standard but does not impose fiduciary duty. Reg BI requires acting in the client's 'best interest' when making recommendations but lacks the ongoing, continuous duty that applies to investment advisers.

Advisers must make full and fair disclosure of all conflicts of interest with sufficiently specific details for clients to make informed decisions. This includes compensation arrangements, relationships with other parties, allocation practices, and any situation where the adviser's interests might conflict with client interests.

Best interest does not necessarily mean lowest cost. Advisers must consider multiple factors including cost, liquidity, risk, potential benefits, volatility, performance expectations, time horizon, and exit costs. The adviser must have a reasonable belief that advice is in the client's best interest based on the client's objectives.

The Series 65 tests fiduciary duty through scenario questions that ask you to identify whether conduct meets fiduciary standards. Questions often test the distinction between fiduciary and suitability standards, what can and cannot be waived, and the components of duty of care and duty of loyalty.

Informed consent means the client understands and agrees to a specific conflict of interest after receiving full and fair disclosure. However, informed consent can only address conflicts under duty of loyalty. It cannot satisfy duty of care obligations or waive fiduciary status entirely.

No. Only investment advisers and their representatives (IARs) registered under the Investment Advisers Act of 1940 are fiduciaries. Broker-dealer representatives are subject to Regulation Best Interest, not fiduciary duty, unless they are dually registered and acting in an advisory capacity.