Competence and Conflicts: How the Series 65 Tells the Two Fiduciary Duties Apart

The duty of care and the duty of loyalty are the two halves of an investment adviser’s fiduciary duty. The duty of care is about the quality of the adviser’s work: understanding the client, giving advice in the client’s best interest, seeking best execution and monitoring the account as agreed. The duty of loyalty is about whose side the adviser is on: never putting the adviser’s interests first, and disclosing every material conflict so the client can give informed consent.

A simple way to separate them is to ask two questions. Whether the adviser did the job properly is a question of care, and whether the adviser put the client first is a question of loyalty.

This guide compares the two duties side by side, then works through ten exam-style scenarios, asking in each one which duty is at stake and why. Preparing for your exam? Watch FRC’s Series 65 playlist on YouTube, with exam traps called out in every topic.

Why the Exam Splits the Fiduciary Duty in Two

For decades, the fiduciary duty was described in general terms, as a duty to act in the client’s best interest. In 2019, the SEC’s interpretation of the standard of conduct for investment advisers organized it into two parts, the duty of care and the duty of loyalty.

That split is useful for the exam, because most fiduciary questions turn on which part has been breached. An adviser can be completely honest and still breach the duty of care through careless advice, or give perfectly sound advice and still breach the duty of loyalty by hiding a conflict.

The duty itself comes from Section 206 of the Investment Advisers Act of 1940, as interpreted by the Supreme Court in SEC v. Capital Gains Research Bureau in 1963. State law, through the Uniform Securities Act and NASAA’s model rules, holds state-registered advisers to the same fiduciary standard.

Where This Topic Appears on the Exams

Fiduciary questions sit in the laws, regulations and ethics section of the Series 65, which carries 30% of the exam. They are usually scenario questions that describe an adviser’s conduct and ask what went wrong.

FRC’s Series 65 Exam Preparation course covers the fiduciary duty, conflicts of interest and unethical business practices, and the exam requires no sponsor. The SIE Examination Preparation course introduces the conduct standards that apply across the industry.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. Once you can sort conduct into care or loyalty, these questions become some of the quickest marks on the exam.

The Duty of Care at a Glance

The duty of care has three components. The first is the duty to give advice in the client’s best interest, which requires a reasonable inquiry into the client’s finances, experience and objectives, and a reasonable belief that the advice fits, with cost taken into account.

The second is the duty to seek best execution when the adviser chooses the broker that executes client trades. Best execution looks at the overall quality of execution, not just the lowest commission.

The third is the duty to provide advice and monitoring at a frequency consistent with the agreed relationship. An adviser managing an ongoing account must monitor it, while an adviser hired for a one-time plan need not.

The Duty of Loyalty at a Glance

The duty of loyalty requires the adviser not to subordinate the client’s interests to its own. It also requires full and fair disclosure of all material facts about the relationship, including fees, the capacity in which the adviser is acting and every material conflict of interest.

The disclosure must be specific enough for the client to understand the conflict and give informed consent. Saying an adviser “may” have a conflict when it actually does is not full and fair disclosure.

Some conflicts cannot be cured by disclosure at all, because the client could not meaningfully understand or consent to them. Those conflicts must be eliminated.

Duty of Care vs Duty of Loyalty: Side by Side

The table below sets out how the two duties compare.

Ten Scenarios: Care or Loyalty?

The fastest way to learn the difference is to sort real conduct into one duty or the other. Each scenario below is the kind of situation the exam describes, followed by the answer and the reason.

Read each scenario and decide before you read the answer. If you get one wrong, look at which question it fails: did the adviser do the job properly, or did the adviser put the client first?

Scenario 1: The Unasked Questions

An adviser builds a portfolio for a new client without asking about her income, her other assets or when she will need the money. The portfolio performs well in its first year.

This is a duty of care breach. The adviser made no reasonable inquiry into the client’s profile, so it could not have had a reasonable belief that the advice fit her.

The good performance does not cure the breach. The duty of care is judged by the process at the time the advice was given, not by the result.

Scenario 2: The Hidden Payment

An adviser recommends a fund family to all its clients. The firm receives extra payments from the fund company for every client placed in its funds, and the clients are not told.

This is a duty of loyalty breach. The payments create a conflict of interest, and without full and fair disclosure the clients could not give informed consent.

FRC’s guide to what conflicts of interest an investment adviser must disclose covers payments like these and other common conflicts.

Scenario 3: The Expensive Share Class

An adviser places a client in a mutual fund share class with a higher annual expense ratio when a cheaper share class of the same fund was available to the client. The adviser receives no extra payment for choosing it.

This is mainly a duty of care breach, because the adviser did not give proper weight to cost when an identical, cheaper option existed. If the adviser had received extra compensation for the more expensive class, it would also be a duty of loyalty breach.

The SEC does not require the cheapest option in every case. But where two choices are otherwise identical, choosing the more expensive one is hard to defend.

Scenario 4: The Favored Account

An adviser places block trades and waits until the end of the day to decide which accounts receive them. Profitable trades tend to end up in the adviser’s own account, and losing trades in client accounts.

This is a duty of loyalty breach, known as cherry-picking. The adviser placed its own interests ahead of its clients’.

Trades should be allocated fairly, according to a policy set before the results are known. Allocation after the fact is one of the clearest loyalty breaches on the exam.

Scenario 5: The Neglected Account

An adviser agrees to manage a client’s portfolio on an ongoing, discretionary basis for an annual fee. For two years, the adviser makes no changes and never reviews the account, even as the client’s circumstances change.

This is a duty of care breach. The agreed relationship included ongoing management, so the adviser had to monitor the account at a frequency consistent with that agreement.

Compare this with an adviser hired for a one-time financial plan. That adviser has no ongoing duty to monitor, because monitoring was never part of the service.

Scenario 6: The Convenient Broker

An adviser sends all client trades to a broker that pays for the adviser’s research subscriptions, even though other brokers would execute the trades more favorably. The arrangement is not disclosed.

This breaches both duties. Failing to seek best execution is a duty of care breach, and directing trades for the adviser’s own benefit without disclosure is a duty of loyalty breach.

Arrangements in which a broker provides research in return for client trades are permitted only within strict limits and with disclosure. The exam often tests them as a two-duty scenario.

Scenario 7: The Vague Disclosure

An adviser’s brochure says the firm “may receive” compensation from product sponsors. In fact, it receives such compensation on most of its recommendations.

This is a duty of loyalty breach. Disclosure must be full and fair, and saying a conflict “may” exist when it does exist misleads the client about how significant it is.

The exam uses this wording as a trap. If the conflict is real, the disclosure must say so plainly.

Scenario 8: The Waiver Clause

An advisory contract includes a clause stating that the client waives any claim against the adviser for breach of fiduciary duty. The client signs it.

The waiver is ineffective, and including it raises concerns under both federal and state rules. The fiduciary duty cannot be waived, although the client and adviser can agree on the scope of services.

A clause like this is known as a hedge clause. Questions often ask whether a signed waiver protects the adviser, and the answer is no.

Scenario 9: The Rollover Pitch

A client has $500,000 in a low-cost employer retirement plan. The adviser recommends rolling it into an advisory account that will pay the adviser an annual fee, without comparing costs or services.

This involves both duties. The duty of care requires the adviser to compare the options and have a reasonable basis for the recommendation, and the duty of loyalty requires the adviser to disclose that it earns more if the client rolls over.

If a proper comparison shows the rollover serves the client, the adviser can recommend it with full disclosure. FRC’s guide to IRA rollover vs IRA transfer covers how the move itself works.

Scenario 10: The Product the Adviser Did Not Understand

An adviser recommends a complex structured product to a client because the sponsor’s materials made it sound attractive. The adviser does not understand how the product performs if markets fall sharply, and the client suffers a large loss.

This is a duty of care breach. An adviser must understand a product well enough to judge whether it fits the client before recommending it.

Lack of understanding is not a defense. If anything, it is the clearest evidence that the adviser could not have had a reasonable basis for the advice.

How the Fiduciary Duty Compares With the Broker-Dealer Standard

Broker-dealers have traditionally been held to a suitability standard, which applies when a recommendation is made. Since June 2020, Regulation Best Interest has required broker-dealers to act in a retail customer’s best interest when making a recommendation, with care, disclosure and conflict obligations.

The key difference is duration. An investment adviser’s duties of care and loyalty apply throughout the relationship, while a broker-dealer’s obligations generally apply at the time of each recommendation.

FRC’s guides to fiduciary standard vs suitability standard and what fiduciary means explain the wider framework.

The Exam Traps

The first trap is believing disclosure cures everything. Disclosure can address many loyalty conflicts, but it never cures a duty of care breach, because unsuitable advice stays unsuitable however clearly it is disclosed.

The second trap is judging the duty of care by results. A recommendation that made money can still breach the duty, and one that lost money can still meet it, if the process was reasonable.

The third trap is believing a signed waiver releases the adviser. The scope of services can be agreed, but the fiduciary duty cannot be waived.

For more traps like these, see FRC’s guide to Series 65 exam traps and common mistakes. The Series 65 ethics questions guide covers the rest of the laws and ethics section in depth.

A Memory Aid

Remember “care is competence, loyalty is conflicts.” If the problem is how well the adviser did the work, it is care; if the problem is whose interests came first, it is loyalty.

When both are present, as in the convenient broker and rollover scenarios, the answer is both duties. The exam rewards candidates who spot when a single act breaches both.

Practice Questions

Question one: an adviser recommends an investment without asking about the client’s time horizon. Which duty is breached? The duty of care.

Question two: an adviser allocates profitable trades to its own account after the results are known. Which duty is breached? The duty of loyalty.

Question three: can full disclosure cure a recommendation that is unsuitable for the client? No, disclosure cannot cure a duty of care breach.

Question four: an adviser sends client trades to a broker that pays for its research, without disclosure and without seeking best execution. Which duties are breached? Both the duty of care and the duty of loyalty.

Question five: a client signs a contract waiving all claims for breach of fiduciary duty. Is the adviser protected? No, the fiduciary duty cannot be waived.

Related Questions

Fiduciary questions connect closely to the broker-dealer conduct rules. FRC’s guides to FINRA Rule 2090 vs Rule 2111 and FINRA Rule 2010 vs Rule 2020 cover the know-your-customer, suitability, ethics and antifraud rules on that side of the industry.

For the role these duties apply to, read FRC’s guide to what an investment advisor representative is.

Get Exam-Ready

Scenario questions on the fiduciary duty are among the most dependable marks in the ethics section once you can sort conduct into care or loyalty. The FRC Series 65 playlist linked at the top of this guide covers every exam section, with the traps to look out for in each one.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE or both, structured exam preparation turns ethics scenarios into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

The duty of care asks whether the adviser did the job properly, through best interest advice, best execution and monitoring. The duty of loyalty asks whether the adviser put the client first, through avoiding self-preference and making full and fair disclosure.

Work through the ten scenarios again until you can sort each one in seconds, and you will be ready for every version of this question the exam can ask.