By Juliette Fairley
In 2008, a majority of mutual fund categories had negative returns in the neighborhood of 40%, according to Lipper. As a result, financial advisor Chris Hardy became curious.

"I pulled the annual reports of mutual fund companies to see what they were invested in. I realized that some of the funds were not spinning true to what they said they were investing in, which caused me immediate concern. That's when I began investigating whether mutual funds were living up to their fiduciary duty," said Hardy, director of planning and investments at Paramount Investment Advisors in Suwanee, Ga.

With some 25 million in assets under management, Hardy compares the asset allocation listed in annual reports with Morningstar and S&P data.

"Finding out whether a mutual fund company is meeting its fiduciary data is easier today than it was four years ago," said Hardy. "Prior to the 2008 financial collapse, I took it at face value that mutual fund companies were investing in the way that was stated in prospectuses."

The fiduciary duty of mutual fund companies that financial advisors invest in has been in the spotlight recently as a result of a Supreme Court decision that said Janus Capital Group could not be sued for supposedly misleading statements in the prospectuses of its mutual funds, which some experts fear place liability squarely in the lap of financial advisors.

A mutual fund company's fiduciary duty is to put the interest of the shareholder first as specified in the investment company act, according to Knut Rostad, president of the Institute for the Fiduciary Standard in Vienna, Va.

"There are several things to look for, including fees and operating expenses in relation to long-term performance and fiduciary duty," said Rostad. "Look for whether fund managers are invested in the fund themselves and how much of the market is embodied in the fund. The greater the diversification, the better. "

Financial and economic expert Lynn Turner said financial advisors can look at a mutual fund company's voting record, which is public.

"The investor is looking for some accountability and responsibility. The only people they have to look to is the financial advisor who invested their money or to the actual trustee of the trust. The court decision causes investors to look at whether their financial advisor put them into a credible trust or and whether the trustees of the mutual fund are fulfilling their fiduciary duty," said Turner, who spoke at the John C. Bogle Investment Forum in Manhattan on January 31.

Former chairman of the U.S. Securities and Exchange Commission (SEC), David Ruder, is more concerned about the liability that load fees pose than whether the mutual fund company that a financial advisor invests in is meeting its fiduciary duty.

"Many financial advisors are getting compensation for picking certain funds, which creates potential conflicts of interest. They may get load fees and as a result could be vulnerable to lawsuits for that," said Ruder, who was also a speaker at the legacy forum on fiduciary stewardship.

Financial advisor Phil Cioppa leans on his broker-dealer's managed platform to reduce the risk of liability.

"We're still liable, but the greater liability lies on the company putting together the portfolio. There's less responsibility on the financial advisor since the broker-dealer made the choice," said Cioppa, who is managing principal and chief investment officer of Arbol Financial Strategies in Norwalk, Conn. "The fiduciary duty of a mutual fund is becoming more relevant as new Finra regulations overwhelm us. The message is, be serious, cautious and ethical. "

The Dodd-Frank Wall Street Reform and Consumer Protection Act makes no specific reference to advisor oversight duties for Finra, but at least two of its provisions suggest that regulators could head in that direction.

Financial advisor Monty Agarwal doesn't invest in mutual funds at all. "Mutual funds have a long way to go to fulfill their fiduciary duty to investors. In order to observe fiduciary duty, the fee structure of mutual funds has to change. If fees were incentive-based, the mutual fund's interest would be aligned with the interest of its investors," said Agarwal, who has $200 million under management in Palm Beach Garden, Fla.

Advisors' clients are increasingly playing a role in the attention paid to the fiduciary duty of mutual fund companies.

"Over the last 30 to 40 years, as investors have become responsible for their retirement funds, fiduciary duty has become more important because conflicts of interest are associated with greater costs, which are associated with reduced returns," said Rostad. "Financial advisors get the highest quality of investments for their clients by avoiding conflicts of interest at all costs. And conflict of interest is what fiduciary duty is supposed to eliminate."