I often get asked what and how much information an investment adviser must gather from clients in order to ensure that it can satisfy its fiduciary duty of care to make suitable recommendations in the best interest of its clients.
By way of background, the duty of care requires an SEC-registered adviser to establish a reasonable understanding of the client’s objectives. How an adviser establishes this reasonable understanding can vary based on nature of the client, the scope of the adviser-client relationship, and the nature and complexity of the anticipated investment advice
For retail investors, the SEC has explained that this duty requires, at a minimum, that the adviser make a reasonable inquiry into the client’s financial situation, level of financial sophistication, investment experience, and financial goals. Yet, depending on the circumstances, more information may be required. For example, an adviser undertaking to formulate a comprehensive financial plan for a retail client would generally need to obtain a range of personal and financial information about the client, such as current income, investments, assets and debts, marital status, tax status, insurance policies, and financial goals.
Advisers should review the information they are collecting from clients to ensure that they are satisfying their fiduciary duty of care.