Fiduciary vs. Suitability - key reasons it matters!
It does not sound like much, but these two words, fiduciary versus suitability, are critical to determining the type of care and investment advice you receive from your financial professional.
Fiduciary standard vs. suitability standard of care
What is the difference between fiduciary and suitability?
In a nutshell, fiduciary advisors have to put the client’s best interests before their own at all times, while broker-dealer representatives who are not fiduciaries are only required to ensure their recommendations are suitable at the time the recommendation is made.
We strongly believe that in order to reap the full benefits of an advisor, investors should work with fiduciaries. Unfortunately, only a portion of financial professionals are held to a fiduciary standard of care.
Many so-called financial professionals are considered broker-dealers by the Securities and Exchange Commission (SEC) and are held to the suitability standard, which is a lower standard of care.
Fiduciary vs. broker
Let’s start with some definitions. What is a fiduciary, and what is the fiduciary standard of care?
Merriam-Webster defines a fiduciary as “a relationship in which one party places special trust, confidence, and reliance in and is influenced by another who has a fiduciary duty to act for the benefit of the party.” Registered Investment Advisors (RIA firms) are required to act in a fiduciary capacity.
- The law requires that the advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest.
- RIA firms must register with the SEC or with their state regulatory authority and file a Form ADV detailing how they are paid, how they invest, any disciplinary actions against them, and any conflicts of interest.
- Registered Investment Advisors held to the fiduciary standard must also disclose any conflict, or potential conflict, to the client prior to and throughout the engagement.
- The advisor must adopt a Code of Ethics and fully disclose how they are compensated.
- All recommendations must be made only after thorough and comprehensive research.
- The advisor must work for the client and only the client. The client’s best interest should be their only concern.
- Fiduciary advisors are regulated by the Investment Advisors Act of 1940.
What standard do brokers follow?
Unless they are dually registered (both registered as a broker dealer and an investment advisor), brokers working for a broker-dealer firm or an insurance company are only held to the suitability standard. The suitability standard, by contrast, requires brokers to recommend investment products that are “suitable at the time of purchase,” based on the information provided by the client. In other words, it doesn’t necessarily have to line up with your goals – it just can’t be inappropriate from the perspective of risk, cost, etc.
- There is no requirement that the recommendation must be in the client’s best interest.
- Conflicts of interest need not be disclosed under the suitability standard.
- Brokers are regulated by FINRA, while insurance agents are regulated by their state’s insurance commissioner.
- There is no requirement that the client’s best interest be their only concern.
Are brokers fiduciaries?
The only way a broker is a fiduciary is if the broker is associated with a dually registered firm. If they are registered both as a broker dealer and investment adviser, they may be considered a fiduciary when they are acting in the investment advisor capacity.
There are important differences between a fiduciary, who follows the fiduciary standard of care 100% of the time, and a broker, who is required only to follow the suitability standard.
Is my financial advisor a fiduciary?
It’s important to fully understand your relationship with the person handling your investments.
We suggest that all investors ask their advisors if their advice is subject to the fiduciary or suitability standard. Get the answer in writing. Anyone who fails to answer this question directly is suspicious and should be avoided.
Some brokers may work for a dually registered firm and therefore are held to the fiduciary standard when they are wearing their investment advisor hat. If a dually registered rep is acting as an investment advisor, they are following the fiduciary standard.
Beginning June 30, 2020, regulations require brokers and brokerage firms to stop using the term “advisor” if not dually registered reps acting as investment advisors (see fiduciary vs broker above). This enables investors to identify and understand their relationships more easily.
Concluding thoughts on the fiduciary standard
The question of suitability vs. fiduciary is one of the largest determining factors in the quality of service you receive from your financial advisor.
Why wouldn’t you want to work with a fiduciary financial advisor? You may have your reasons for doing so. Perhaps the person came highly recommended, or you just feel you click with him or her.
But in our view, we don’t feel it’s in your best interest to have your guessing whether or not a recommendation was made with your best interest in mind. If a broker recommends a high commission mutual fund instead of a low-cost ETF, there’s nothing that says it wouldn’t necessarily be worth the higher fee paid. However, you’ll never know for sure that you’re getting the best possible advice for your money unless you work with a fiduciary financial advisor who is legally obligated to make sure that it is.
Work with a fee-only, fiduciary financial advisor
Vericrest Private Wealth is a fiduciary financial advisor firm and as such we follow the highest possible standard of care in our treatment of our clients.
Our firm is, and always has been, built on what is best for the client. Our advocacy of—and adherence to—the fiduciary standard of care is confirmation of that unwavering commitment.
If you would like to discuss the benefits of working with a fiduciary financial advisor such as Vericrest, please set up a time to speak.