Suitability Versus Fiduciary Responsibility: Mind over money?

by on February 10, 2015 - 2:00pm


You have just finished a nighttime MBA program in finance. This, combined with the CFA designation, permits you to change your regulatory status from a regular stock broker to a discretionary portfolio manager (Anonymous).  As a stock broker, you need to speak with your client before every trade, which is a hassle, but on the upside you only have a “suitability” standard to uphold (Anonymous).  This means as long as an investment is suitable for a client, you have fulfilled your obligations (Anonymous).  In dollar and cents terms, if a balance mutual fund is appropriate for a client then any balanced fund will do.  The one that pays you 6% commission or 1% commission are equally fine when it comes to suitability and fulfilling your obligation to the client. 

Should you choose to use your newly completed education to upgrade your regulatory status to a discretionary portfolio manager, then you have a “fiduciary” responsibility towards your client (Anonymous).  The upside is that you do not have to speak with the client, but you do have to do what is in their best interest at all times (Anonymous). Following the fiduciary standard is no problem for a well-off professional such as yourself. However, your income would go down as your client’s returns go up.  Therefore, should you choose to continue as a stock broker and follow the suitability principle or should you become a portfolio manager and follow the fiduciary standard?

Within the fiduciary standard, deontological ethics is applied because the broker is always suppose to put their clients needs above their own regardless of their personal goals or due to a difficult situation because it is “the right thing to do”. Deontology is defined as universal maxims and the duty to follow them. A common maxim that stems from Christianity is the idea of putting others before yourself. The fiduciary standard therefore involves deontology due to the fact that following its standard of putting others before oneself and becomes the portfolio manager’s duty. On the other hand, teleological ethics apply to the suitability principle considering that a broker can encourage their client to buy a mutual fund without having their clients’ best interest at hand and may differ according to the brokers personal desires such as money (earned on commission). The broker can choose between different stocks (means) and might decide on choosing one that will not necessarily be the best choice for their client, but will result in a profit (ends) for themselves for selling it.

My recommended solution to this problem is to become registered to the highest standard of fiduciary responsibility.  This will allow the individual to do what is best for their client and save time from speaking with them to solicit other business.  The clients themselves will also become a source of referrals over time.  In this way, both the client and the investment professional are both long-term winners.

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