Fiduciary vs. Suitability Standard
Registered Investment Advisors (RIAs) are held to a fiduciary standard — they must act in clients' best interests in all respects. Broker-dealers are held to a 'suitability' or 'best interest' standard under Reg BI that is less demanding. This distinction affects how each type of professional must approach PFOF and execution quality in client accounts.
Reg BI and PFOF
The SEC's Regulation Best Interest (Reg BI), effective since 2020, requires broker-dealers to act in customers' best interests when making recommendations. However, Reg BI does not require the strict fiduciary standard applied to RIAs. Whether Reg BI adequately addresses the conflict of interest in PFOF routing is debated.
Fiduciary Advisors and Execution Quality
RIAs who manage client accounts in which individual securities are traded have a fiduciary obligation to consider execution quality — not just the investment decision but also how the investment is executed. A fiduciary advisor should evaluate whether the broker-dealer used for client accounts is meeting best execution standards, including in PFOF routing contexts.
Asking Your Advisor
Investors with financial advisors can ask: Are you a fiduciary? What broker-dealers do you use for client trades? Do those brokers receive PFOF? How do you evaluate best execution? Fiduciary advisors should be able to answer these questions clearly and should have documented best execution policies.