Market participants are expected to act selfinterestedly.As Arthur Laby has recognized: “When acting as a dealer, the firm seeks to buy low and sell high – precisely what the customer seeks. It is hard to see how any dealer can act in the ‘“best interest’ of his customer when trading with her.”
In contrast to fiduciary duties, the implied covenant enables contracting parties to act selfishly as long as this conduct is at least broadly consistent with the parties’ ex ante expectations based on the contract
Because the principal can negotiate to be paid to cover the risks resulting from separation of ownership and control, both parties have incentives to contract for monitoring and bonding mechanisms – including incentive compensation and control devices – designed to minimize these risks
The strictness of the fiduciary duty helps explain its limited scope. A duty of self-abnegation is only rarely appropriate in a competitive marketplace. Such a duty is usually excessively costly when applied to commercial dealings because it undermines the incentives that motivate business people to provide high-quality goods and services.
Instead of forbidding fiduciary contracts, the law might impose conditions on how parties contract around fiduciary duties that take account of the special circumstances of fiduciary relationships, particularly including the inherent disparity of knowledge and sophistication between entrustor and trustee. For example, courts and legislatures might require fiduciaries to make affirmative disclosures, obtain explicit consent to modifications, or specify a minimal level of duties and remedies
The advice’s value depends on whether it is tainted by self-interest. Investment advice, for example, may be a “credence good” whose value is not apparent at the time of sale. Indicia of soundness, such as the absence of conflicts, enable clients to evaluate the advice. An advice seller accordingly may have to disclose material conflicts that significantly affect the value of the advice, just as the seller of any product may be required to disclose important features of the product…One who decides not only to obtain advice from an expert but to entrust her property to the expert’s management ceases to make her own decisions concerning whether and how much to rely on each of the fiduciary’s judgments… It traces back to SEC v.Capital Gains Research Bureau, Inc., which held that an adviser’s “scalping,” or purchasing shares before recommending them and then selling on the rise in market price, “operates as a fraud or deceit upon any client.” While the Court referred to investment advisers as fiduciaries, its holding was based on an interpretation of the common law of fraud, and amounts only to a duty to disclose the material fact of an adviser’s self-interest rather than a fiduciary duty of unselfishness.