Fiduciary vs. Suitability and Our Portfolio Management Process

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By Michelle Bernardi Landis

I have spoken to a number of clients recently regarding the impact the Department of Labor’s (DOL) Fiduciary Standard ruling will have on their qualified plans.  Even though the DOL ruling only affects retirement accounts, it became clear to me during the course of these conversations that investors are confused about the differences between a Fiduciary Standard and a Suitability Standard. I thought it would be a good idea to offer some clarity on these differences and explain how these standards relate to your account and our portfolio management process.

Bernardi Securities, Inc. (BSI) is a registered broker-dealer, is regulated by Finra/SEC, and is subject to Suitability Standard industry regulations. Bernardi Asset Management (BAM) is a subsidiary of BSI, is a SEC registered investment advisor (RIA) and is subject to Fiduciary Standard industry regulations. We offer both options of bond portfolio management services to our clients.

Many clients choose the BSI bond portfolio management option.  Under this platform, clients are charged a one-time mark up and for many investors this option is a more cost effective choice for them.  As a broker-dealer, BSI is subject to the Suitability Standard.  The Suitability Standard require the broker dealer to deal fairly with investors, perform due diligence to ensure an investment is reasonably suitable for a specific client based upon his or her needs, sophistication, risk tolerance and financial circumstances (Finra rule 211). We utilize the BSI Investor Profile, Bond Offering Profile and Statement of Understanding documentation as a step in our process to help ensure we are meeting and exceeding our suitability requirements for client relationships held through our broker-dealer arm.   Additionally, BSI is also subject to “Know Your Customer Rule” which requires it to know of and understand a client’s financial situation making it more likely an investment recommendation is suitable (Finra 2090).  Recent implementation of the Best Execution rule  require the   broker-dealer to use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under the prevailing market conditions ( Finra rule 5310 & MSRB rule G-18).  Numerous articles have been written implying that a Suitability Standard is somehow an inferior business model.  These rules provide a glimpse of the many industry regulations designed and enforced to protect investors who conduct business through a broker-dealer model.

Similarly, many clients choose the BAM/RIA bond portfolio management option. Under this platform, clients are assessed an annual fee based upon assets under management.  As a RIA, BAM is subject to a higher, Fiduciary Standard of care.  The Fiduciary Standard requires the investment manager to put their client’s interest ahead of its own, avoid conflicts of interest and fully reveal all compensation for investments it recommends.  This platform is the gold standard in our industry and many clients prefer a fee based platform and are willing to pay an ongoing fee for this standard of care.

In either case, both platforms offer our expert bond portfolio management approach to ensure a professional, fair and transparent process.  One of our primary goals is to offer our investors a choice because “one size does not fit all”. I would urge you to contact your investment specialist to discuss our various bond portfolio management options to determine which option is best suited for your needs. As Chair of our Standards Committee, I can assure you whether you are a client through BSI or BAM, we are continually evaluating and adapting our processes in order to meet industry changes, reviewing and resolving any potential conflicts of interests and always striving toward a common goal of aligning our interests with the interests of our clients.

Thank you for your continued confidence in Bernardi Securities, Inc. and Bernardi Asset Management.

Michelle Bernardi
Senior Vice President