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What is the Fiduciary Standard?

The Fiduciary Standard stipulates that an advisor must place the client’s best interests first.

The best way to understand the fiduciary standard is to think in terms of another standard, called the suitability standard. The suitability standard says that a broker/advisor need only recommend investment products that are “suitable” for the client - but those investments do not necessarily have to be in the client’s best interests.

An example would be a broker recommending a proprietary bond fund for a client looking for a fixed income solution. The bond fund is certainly suitable, so the broker is not breaking any rules, but he/she is only recommending that particular one because they earn a commission from its sale.

In this way, the broker may not be acting in the best interests of the client, since there may be better, less expensive bond funds available in the investment universe. The fiduciary standard says that the advisor must go out and try to find the best possible solution - in this case, the best, most effective bond fund - for the client’s portfolio.

In this way, the advisor must act in the best interests of the client, even if it means not earning a handsome commission. The advisor must do his/her best to make sure investment advice is made using accurate & complete information (analysis is thorough & accurate as possible).

There is little question that the fiduciary standard better protects individual & institutional investors, than the suitability standard.

What is the Suitability Standard?
What is Due Diligence?

Keywords: financial planning, retirement planning, fiduciary standard, suitability standard, commissions,