Conflict of Interest Expert Opines on Wealth Management Firm


This case involves fees paid to an investment adviser by mutual funds. The defendant, a wealth management fund, was a registered investment adviser and advised clients on which mutual funds to invest in. Typically, investment advisers are paid by clients with fees which are determined by the growth or decrease of the client’s assets. In addition to this fee arrangement, however, the defendant was also receiving money from mutual funds (in some cases, as high as .5% of the assets that the client put into the mutual funds) when the adviser had a client invest in that mutual fund. Additionally, the adviser did not disclose this information to his clients. When investors discovered this payment arrangement, they brought suit against the defendant, alleging that the adviser broke his fiduciary duties.

Question(s) For Expert Witness

  • What are the fiduciary and disclosure requirements for investment advisers at wealth management firms?

Expert Witness Response

Typically, registered investment advisers are subject to fiduciary duties. This calls for a duty of loyalty to one’s clients, with disclosure of any conflicts of interest. This creates a circumstance where the advisers need to put the interests of their clients before their own. Because of the existence of this duty and, given the facts of this case, the investment adviser should have disclosed the specific mutual funds it received payments from, and the reasons for the payment (by this, I simply mean that the adviser should have relayed to clients that the payments were, essentially, a kick-back). There is some confusion regarding the exact manner of how disclosures should be made, but regular disclosures to clients is the only way to ensure compliance with the law. Also, possible changes brought about by Section 913 of Dodd-Frank may require advisers to pass these payments from mutual funds on to clients through lower administrative costs, depending on the nature of the investment strategy. A full review of the case will show what duties the adviser may have breached, but it appears that the investment adviser may be liable. I have over thirty-five years of experience working with mutual funds and as an investment adviser, and I am very familiar with the standards of fiduciaries in this context.

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