Robert A. Bonavito, CPA PC

Fiduciary Standard vs Suitability Standard

Video Transcript 

My name's Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only.

When we testify on a New York Stock Exchange, or one of the arbitrations or mediations on the behalf of a client, an investment fund or a brokerage firm, we always look at two standards that they have in order to provide investment advice to their clients. You have fiduciary and suitability are the two main standards that the broker has to his client. It's important to understand the difference. The standard most brokers apply is the suitability. Is it suitable for you? For example, if you walk in to a broker or an investment advisor and you say, "I'm interested in buying an investment to retire on," well, what's suitable for you? Suitability, it could be a mutual fund, it could be a stock fund, it could be mutual funds, it could be anything, right? It's suitable. As long as it's not harming you, it doesn't matter. Let's say if a mutual fund's paying you commissions of 30%, another one's paying 10%, he can steer you into the one that's paying 30% because it's suitable for you. It's not a problem. If it's suitable, he's okay.

Now, the U.S. Department of Labor has a new standard that they're trying to enforce, which is called fiduciary standard. Fiduciary standard is not what is suitable for you, it's what is best for you, what is the best thing for you. Now, if I have the choice of putting a client in two funds, one is a 30% commission, the other's 10%, now, under the fiduciary standard, I have to give him the one that's only paying me 10% if they're equal in all other respects. And this is important to understand because if you're taking advice from somebody, you say, "What standard are you applying? Are you giving me a suitability standard or a fiduciary standard?" I've never seen, in all the years of my practice, someone steer someone into a treasury bill or treasury bond, in most cases. It doesn't happen, because if you go to an investment advisor, they don't make a commission on that. And again, someone has to pay for the office and all the other stuff. So usually, in the past, you won't see that. Now, with the fiduciary standard, you're gonna see more and more people steered into other investments that they normally would not purchase, which are probably better for them and better for the investment advisor because he's gonna have a client who's wealthier and happier and use more of his advice. So, just considering what we're talking about here, if you have any questions on this please feel free to give me an email.

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