What better topic for the month of Valentine’s Day than that offiduciary duty? As those once and forever smitten by the arrow ofcupid can attest, love means, among other things, putting theinterests of another above those of your own. This same moral ethicdefines the fiduciary duty.

Of course, it wasn’t always that way. One of the key elements oftrust law—from which we derive our definition of fiduciary duty—comes from two provisions of the Magna Carta. When he signed theMagna Carta in 1215, King John agreed estates would be managed onlyfor the benefit of the beneficiaries. This eliminated both outrighttheft as well as the more sneaky kind of theft known as“self-dealing” transactions.

The definition of fiduciary duty has been finely tuned in thelast eight centuries. Since 1940, with an acceleration beginningaround 1970, one of the most important fiduciary duties—that ofproviding investment advice—has shifted from stodgy bank trustdepartments to “go-go” investment advisers registered with theSecurities and Exchange Commission. The Investment Advisers Act of1940 requires all registered investment advisers to act with thesame fiduciary duty as a trustee, even though they are not named astrustees.

Over the last generation, other financial service providersdiscovered how much more lucrative the investment advisery businesswas compared to their brokerage or insurance businesses. They begancalling themselves “advisors” (notice the “or” ending, as only asSEC registered investment advisers can use the “er” ending).

The distinction goes far beyond the need to irritate Englishteachers across the nation. Advisers, as fiduciaries, have a legalmandate to place client interests first. Advisors, on the otherhand, must only provide “suitable” investments to clients whileplacing their firm’s interests first. This means a lot of those“self-dealing” types of transactions. Remember, self-dealingtransactions are so illegal for trustees, not even disclosure cansurmount their prohibition. For a non-fiduciary, however, not onlyare self-dealing transactions allowed, their inherent conflict ofinterest often does not have to be disclosed.

In the retail investment market, caveat emptor rules.The same cannot be said of the retirement plan market. Thisdistinction can significantly impact the fiduciary liability ofplan sponsors. A 2010 academic study suggests legal self-dealingtransactions can actually harm investors. If a plan sponsor failsto hire a fiduciary to provide investment advice, the liabilityinsinuated by this study accrues solely to the plan sponsor who is,by definition, a fiduciary. Even if the plan sponsor hires afiduciary, the nature of the relationship may or may not limit theliability of the plan sponsor.

There are two types of fiduciary relationships. Anon-discretionary (ERISA 3(21)(a)) adviser only makesrecommendations and the plan sponsor must make the actualinvestment decision. In this relationship, the plan sponsor retainsnearly all the fiduciary liability. On the other hand, adiscretionary (ERISA 3(38)) adviser makes investment decisions and,given the Uniform Prudent Investor Act, assumes most of thefiduciary liability from the plan sponsor.

And you thought love was complicated.