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The Crucial Distinction: Fiduciary vs. Suitability Standards in the Financial Industry


Doing the Right Thing

I have always loved cartoons like this. Tongue in cheek, to the point, and a whole concept summarized in one picture. But this topic is one of passion for me and other financial planners. I wrote a similar post, Know Where Your Money Is, about a year ago. This post is a bit more 'Know Who You Are Working With.'


The Fiduciary Standard (and that other one)

In the realm of financial advice and investment management, two fundamental standards govern the relationship between clients and financial professionals – the fiduciary standard and the suitability standard. Understanding the crucial differences between the two is paramount for individuals seeking financial guidance.


A fiduciary is bound by a duty to act in the best interest of their clients. This means putting the client's needs and financial well-being ahead of the advisor's (or the advisor's firm's) interests. For example: selling an indexed annuity to a 95 year-old widow who will likely never see the investment function and perform as designed is not in the client's best interest. But the salesperson who sold it will get a nice commission. (this sadly happens more often than you think)


On the other hand, professionals adhering to the suitability standard are only required to recommend products that are suitable for their clients' financial objectives and risk tolerance, without necessarily being the absolute best option. An example of the suitability standard would be an advisor having 3 'suitable' mutual funds to choose from. They will all suit the client's needs, but all have different fees and commissions. The advisor, surprisingly, can choose the highest commissioned product.


Look, providing financial planning advice isn't the same as prescribing medicine. But the wrong advice and zero accountability can severely damage one's financial well-being and future. If your doctor didn't always act in your best interest, but their own, would you trust them?


It Is All About Trust and Accountability

The example above highlights the conundrum of two different standards. These two standards have been confusing investors and savers long before the Bernie Madoffs of the world polluted our industry with their greed and sinister behavior. I have long been on a crusade to educate the public on the difference between a fiduciary advisor and one who is not. In my personal opinion, when advising on and planning around someone's personal finances, a suitability standard is completely unacceptable. We aren't selling cups of coffee here. This begs the question, who is a fiduciary and who is not?


Who is a fiduciary is much clearer than who is not:

Certified Financial Planners (CFP): Any professional who holds the CFP® designation is held to a fiduciary standard by the CFP board of standards.

Registered Investment Advisors (RIAs): These firms make up many of the investment, planning and wealth management firms that are shaping the advisory industry's future. CFPs that work for an RIA are technically held to a double layer of the fiduciary standard behavior.

Trust Banks: Bank trust departments must act in a fiduciary fashion. But beware, not all wealth management groups under the banking umbrella fall into this requirement.


There are plenty of individuals that are still advising clients and families without the need of upholding the standard of a true fiduciary standard. Stock Brokers (even those who work at banks) and insurance salespeople are just two examples. Without one of the above associations, investors should do their homework and ask questions.



Fiduciary Standard vs Suitability Standard

The importance of working with a fiduciary becomes evident when considering the level of trust and transparency required in financial matters. Fiduciaries are legally obligated to provide advice that aligns with their clients' best interests, fostering a relationship built on trust and accountability. In contrast, advisors operating under the suitability standard may recommend products that are suitable, but not necessarily the most cost-effective or beneficial for the client. This potential conflict of interest poses a risk to the client's financial success, as the advisor may prioritize their own financial gain, or their firm's financial gain, over the client's long-term objectives. Working with a fiduciary is especially crucial when dealing with complex financial matters, such as retirement planning, investment management and estate planning. Fiduciaries must thoroughly analyze various options, disclose potential conflicts of interest, and provide comprehensive, unbiased advice that caters to the client's unique financial situation.


Choosing a fiduciary over an advisor operating under the suitability standard ensures that the client's best interests are at the forefront of every decision. This distinction becomes even more significant in an era where financial markets are dynamic and personalized, and strategic planning is essential for long-term financial success.


Ask The Right Questions

As we enter a period of massive wealth transfer, complex tax laws and more investment options than one can keep up with, choosing the right individual or team with the right intentions to guide you through your financial journey has become a discovery process. But, not one to be taken lightly.



2 comentarios

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Invitado
31 ene
Obtuvo 5 de 5 estrellas.

Helpful. Thanks.

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Thomas Delorie
Thomas Delorie
29 ene
Obtuvo 5 de 5 estrellas.

As always, well done!

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