What does the duty of loyalty require under CFA Institute standards?

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AcadiFi · Accepted Answer

Duty of loyalty is the principle that investment professionals must place client interests ABOVE their own, their firm's, and any third party's. It is the cornerstone of Standard III(A): Loyalty, Prudence, and Care.

Concretely, the duty requires:
1. No self-dealing — you cannot use client assets or information for personal benefit
2. No conflicts unless disclosed and consented — any material conflict must be disclosed in advance
3. Best execution — trades routed to achieve best price and execution, not to generate soft dollars or revenue
4. No undisclosed compensation — any gifts, commissions, or rebates from third parties must be disclosed
5. Proxy voting — votes must be cast in client interest, not management's or the firm's

Consider Hanna Melchiorsen, portfolio manager at Aalborg Wealth Partners. She manages 86 client accounts. A broker offers her a free conference trip worth $4,200 for directing block trades to their desk. Accepting creates a conflict: she might route trades suboptimally to maintain the relationship. Duty of loyalty requires either declining the trip, paying for it personally, or full written disclosure AND client consent before routing trades through that broker.

Edge cases:
- Dual-capacity: if acting as both broker and advisor, disclose both roles
- Family accounts: family members' accounts cannot be prioritized in allocation
- Employee trading: firm trades before client trades violates loyalty (front-running)
- Soft dollars: permissible only for research benefiting the client, fully disclosed

Violations are egregious: in 2024 the SEC fined a mid-size RIA $18M for allocating IPO allocations to insiders' accounts while client accounts received secondary-market fills. Duty of loyalty trumps commercial convenience every time. When in doubt, disclose and get written consent — but even disclosed conflicts may be unethical if they're not truly aligned with client interest.

What does the duty of loyalty require under CFA Institute standards?

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