Fiduciary Standard: Why this matters so much

We make a great effort when working with our clients that they understand their investments and the rationale that supports our investment philosophy. We feel this education is important and a vital part of our relationship.

In some discussions, we are asked how are we different than the "typical broker," such as Merrill Lynch or Smith Barney. There are many answers to this question. In this post, I want to focus on an important distinction that is based in law, but I think really comes into practice regularly and has significant consequences to investors.

We are legally established as a "Registered Investment Advisor" and must adhere to a "fiduciary responsibility." Brokers are subject to a lesser standard, called a "suitability rule." This topic was addressed in a New York Times article dated February 28, 2010, which I will use to explain these differences.

"Registered financial advisers...adhere to a higher standard - "fiduciary responsibility," an ethical and legal requirement that the investor's best interest comes first, not the adviser's own financial gain...Rooted in trust law, that standard means that an advisor has to act impartially and solely for the benefit of the client, avoiding conflicts of interest and self-dealing."

"Brokers are governed by the suitability rule, which requires them to have "reasonable grounds for believing that the recommendation is suitable, according..." to industry standards. "They are not obligated to get you the best price for what they advise you to buy or sell - or even to be free of conflicts."

"What may matter more than the array of services is the mind-set of the adviser. When a broker tells a client to buy or sell something, the suitability rule does not mean the broker has to be free of conflicts of interest. After all, the broker's salary is ultimately paid by the brokerage firm, which has various products to sell. But brokerage firms say they are trying to eradicate that appearance of conflict."

We take this obligation very seriously and it is the core foundation of our firm. We will only act in our client's interest.

As an example, we recently reviewed a statement on behalf of a client, who also has some investments with a major Wall Street firm. The other broker sold a high quality municipal bond, which was to mature in a year, and purchased a bond that was rated as much riskier, based on the rating agency's credit rating. Upon further research, the new bond that was purchased was underwritten by the same Wall Street firm. Thus, it appears that the only reason for the sale and purchase was to support the firm's bond underwriting efforts. Was this broker acting in the client's best interest or his firm's best interest?


Source: New York Times, "Broker? Adviser? And What's the Difference?", February 28, 2010