Fiduciary Conflict Cure
Avoid conflicts or cure them through informed consent and fairness
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 98%
Rhoades describes conflict management as a loyalty process rather than a disclosure formality. The first duty is to avoid conflicts, especially major third-party compensation that can distort a recommendation. If a conflict remains, the fiduciary must affirmatively disclose both its existence and its ramifications, make sure the particular client actually understands, and obtain informed consent. Even that consent does not authorize harm: the proposed transaction must remain substantially fair to the client. The mechanism therefore has two gates. The avoidance gate removes incentives before they can infect judgment; the cure gate tests understanding, consent, and fairness when a conflict cannot be eliminated. This is stricter than the claim that listing a conflict in paperwork completes the duty.
Origin
Ron Rhoades explained how fiduciary law treats conflicts during Masters in Business, contrasting avoidance and cure with disclosure alone.
Core principles
- 01Avoid material conflicts whenever possible
- 02Disclosure alone does not satisfy fiduciary loyalty
- 03Explain both the conflict and its consequences
- 04Consent must follow real client understanding
- 05A client cannot consent to being harmed
How to run it
- 1
Surface the conflict
Identify any payment, affiliation, inventory position, gift, or other interest that could pull the professional away from the client's best interest.
Pro tip Examine indirect and third-party compensation, not only payments made by the client.
Watch out Unconscious self-justification can make an economic incentive look harmless over time.
- 2
Avoid it first
Remove the conflict when a clean alternative is available, such as accepting compensation only from the client.
Pro tip Design the business model so fewer conflicts need case-by-case cures.
Watch out Do not jump directly to disclosure when avoidance is practical.
- 3
Disclose affirmatively
Tell the client what the conflict is and how it could affect the recommendation or cost.
Pro tip Use concrete comparisons so the financial consequence is visible.
Watch out A buried or generic disclosure does not establish understanding.
- 4
Confirm understanding
Apply the explanation to the specific client and verify that they understand the conflict and its ramifications.
Pro tip Ask the client to explain the consequence back in their own words.
Watch out Consent without comprehension is not informed consent.
- 5
Obtain consent
Secure the client's informed agreement only after the conflict and consequences are understood.
Watch out A client cannot validly consent to being harmed.
- 6
Test substantive fairness
Check that the recommendation remains substantially fair despite the disclosed conflict. Decline or redesign the transaction if it does not.
Pro tip Compare the conflicted recommendation with an available conflict-free alternative.
Watch out Disclosure and consent do not rescue an unfair transaction.
In the wild
An adviser would receive an extra fifty basis points for recommending one index fund even though a materially cheaper equivalent is available. The adviser first tries to avoid the payment. If the conflict remains, its ongoing cost and effect are explained, the client's understanding is confirmed, and the recommendation is rejected if the higher-cost choice would harm the client.
→ The process prevents a disclosed incentive from overriding substantive fairness.
Common mistakes
Treating disclosure as permission
Listing a conflict does not by itself put the client's interest first or cure the breach.
Ignoring indirect payments
Third-party benefits can influence judgment even when the client does not write the check.
Skipping the fairness test
Informed consent still cannot make a harmful or substantially unfair transaction acceptable.
Is it for you?
Best for
It is best for fiduciaries reviewing compensation, product, custody, or transaction conflicts before acting for a client.
Not ideal for
It is not ideal for rationalizing a recommendation that still harms the client after disclosure.
From the transcript
“the only way to do that is to avoid conflicts of interest.”
“You disclose the conflict and its ramifications to the client.”
“You get the clients informed consent. And here's the key. No clients ever going to consent to be to be harmed.”
From the episode
Interview With Ron Rhoades: Masters in Business (Audio)
Ron Rhoades