The Fiduciary Standard Explained

Sarah F. Roach, Vice President

There are many companies out there offering to invest your money.  In fact, it seems impossible to watch much TV without seeing we-care-about-you advertisements from several of the large brokerage or insurance firms.  Their ads try to make these firms appear reliable and professional, but it is important to know that the employees who work there may not be required to act solely in their clients’ best interests or even to put client interests first.

Since the Investment Advisers Act of 1940 was enacted, investment advisers and broker-dealers have been held to two different standards of conduct when giving advice to clients:  Specifically, SEC-registered investment advisers like us are held to a “fiduciary” standard, meaning that they owe clients the utmost loyalty and must put client interests ahead of all other interests—most notably their own.  In contrast, broker-dealers are held instead to a “suitability” standard of conduct, meaning that recom­mendations they make for a client need only be suitable—not necessarily in the client’s best interest.  For example, if a growth-oriented investor is sold almost any growth-oriented mutual fund, that’s a suitable investment.  But it may not be the best choice.  (Importantly, the firms are called broker-dealers because they not only “broker” transactions between unrelated parties but sometimes also act as a “dealer”—buying from and selling to clients directly from the broker-dealer’s own account.)

Over the last decade or so, brokers working at large firms have begun calling themselves “advisers” and presenting themselves as such to clients.  This has triggered signif­icant debate in the industry:  If someone calls himself an investment adviser, shouldn’t he be held to the fiduciary standard of an investment adviser, no matter where he works?  Yet many of these “advisers” cling to the lesser standard—suitability—and vehemently fight higher accountability.  Further complicating the issue, some people are registered as both investment advisers and brokers, making it difficult for investors to determine if and when their interests might be put first.

The two standards of accountability have made industry headlines in recent months, when a large broker-dealer terminated two of its top “advisers,” allegedly because they recommended some non-proprietary securities to clients.  The advisers apparently thought investments not on their employer’s proprietary platform (e.g., mutual funds sponsored by another financial firm) were in the best interests of their clients, even though their employer would’ve earned more money if “suitable” alternatives had been selected from among the firm’s own propri­etary funds.  Imagine that—getting fired for putting the client’s interests first!

J. V. Bruni and Company has never been a broker-dealer, has always been an SEC-registered investment adviser and has always been subject to fiduciary standards—which we take very seriously.  We devote considerable energy to making sure that not only are the investments we select in accordance with each account’s objectives and restrictions, but they are also the best investments, in our judgment.  Further, unlike brokerage firms, we never directly buy from or sell to clients.  While some broker-dealers would prefer that their required conduct be spelled out in fine print, we are proud to tell you that your interests are always our top priority.