15 Mar Fiduciary vs. Suitability Advisors: What’s the Difference?
You’ve made the decision to work with an investment advisor, but do you know which type of advisor you want (and need) to work with?
Fiduciary vs. suitability advisors: What’s the difference, and which type is right for you?
When it comes to investment advice, there are two main standards:
#1 Fiduciary Standard
#2 Suitability Standard
If you are unfamiliar with the terms fiduciary or suitability, you aren’t alone.
According to Business Wire, “Many Americans still don’t know how to tell if an advisor is a fiduciary. Only 50 percent of investors who work with a financial advisor are certain that their advisor is a fiduciary, while 38 percent don’t know if their advisor is a fiduciary or not.”
Business Wire also reports that only 21 percent understand the difference between fiduciary vs. suitability advisors.
These terms distinguish the type of advisor – from the type of advice they give to how they are paid.
“93 percent of Americans think financial advisors who provide retirement advice should be legally required to put their clients’ best interest first. However, more than half of respondents (53 percent) mistakenly believe that all financial advisors are already legally required to put the best interests of their clients first,” according to Business Wire.
Did you catch what is written in bold-faced type?
Most people mistakenly believe financial advisors are legally required to look out for their clients’ best interests.
This is a critical distinguishing feature of fiduciary vs. suitability advisors.
In this article, we’re breaking down the difference between the two types of advisors so you can see the type of advisor you select has a HUGE impact on how your money is managed.
Definition of a Fiduciary Advisor
Fiduciary advisors are guided by the law, which makes their role easier to define.
An advisor who operates under the Fiduciary Standard must put their clients’ interests above their own and adhere to the Investment Advisers Act of 1940.
The Investment Advisers Act of 1940 is a law that regulates investment advisors.
The SEC explains, “With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.”
Not only must fiduciary advisors register with the SEC, but they must “conform to regulations designed to protect investors.”
In other words, fiduciaries are legally required to protect a client’s best interests.
This means that they cannot put their interests or their firm’s interests ahead of their clients, such as pushing a particular investment product that will benefit them instead of suggesting the best fit for the client’s financial needs.
- Can be an individual or an investment advisor firm (RIA) and work directly for the client.
- Are required by law to put the client’s interest ahead of their own or their firm’s interest.
- Are regulated by the SEC or state regulators depending on the amount of assets they manage.
- Must file a Form ADV which details how they are paid, how they invest, any disciplinary actions against them, and any conflicts of interest they may have.
- Loyalty is to the client, first and foremost.
When comparing fiduciary vs. suitability advisors, another difference is how they get paid.
Fiduciaries either charge a flat fee or receive a fee for the percentage of assets instead of receiving commissions.
Keep in mind that fiduciaries are legally required to tell you how they are compensated.
Definition of a Suitability Advisor
Now, let’s look at advisors working under the suitability standard (suitability advisors).
Suitability advisors are not held to the same high standards as fiduciaries.
An advisor that works under the Suitability Standard does NOT operate as a fiduciary or adhere to the Fiduciary Standard. They are only required to give suitable advice to a client based on their financial needs and objectives.
Essentially, a suitability advisor must be licensed and recommend suitable financial products for their clients.
They do not have to recommend the products that are the best fit for their clients. The products only need to be suitable to be within their legal obligation.
This means that suitability advisors can push financial products that may work for you when better products are available.
And why would a suitability advisor push a certain financial product when there is a better product for your financial situation available?
Most likely, the advisor gets a kickback, such as a commission or bonus.
In other words, suitability advisors protect their best interests or their firm’s best interests rather than their clients.
- Are usually brokers, or registered representatives, of the broker-dealer.
- Are required to make recommendations that are suitable based on a client’s personal situation.
- Are NOT required to sell products that are in the client’s best interest.
- Are NOT required to disclose conflicts of interest.
- Are regulated by FINRA, of the state’s insurance regulators, if they are insurance agents.
- Loyalty is to their company or broker, first and foremost.
Financial advisors can be paid in several different ways.
When comparing fiduciary vs. suitability advisors, it’s important to understand that suitability advisors are not required to tell you how they are compensated, unlike fiduciary advisors.
Suitability advisors typically get paid based on commissions, which means they are often tempted to push a financial product that will provide a higher commission.
If a potential advisor tells you they are compensated by commission, it’s a clear sign they are not operating under the fiduciary standard.
Discover How Financial Advisors Get Paid.
Why Work with a Fiduciary Advisor
Anyone can call themselves a financial advisor. It’s a loose term that gets thrown around pretty frequently.
But if they charge for investment advice, they are legally required to follow either the fiduciary standard or the suitability standard.
However, it is wiser to work with a fiduciary vs. a suitability advisor.
For starters, fiduciary advisors need ample education and experience before they can even begin the process to become an accredited investment fiduciary. Then, they must complete a program and pass a certification exam.
Once they become a fiduciary, they are regulated by the SEC.
This is key because the SEC uses regulations to ensure fiduciary advisors protect their client’s best interests.
Unlike suitability advisors, fiduciaries are legally required to disclose conflicts of interests, how they are paid, and financial products that are in your best interests.
Fiduciaries operate under both Duty of Care and Duty of Loyalty.
Duty of Care requires fiduciaries to take care to make sure they are doing what is best for their clients, such as conducting research, understanding the client’s goals and risk tolerance, and making informed decisions using this information.
Duty of loyalty requires fiduciaries to act out of loyalty to their clients instead of working in ways that personally benefit themselves or their firms.
If you work with a suitability advisor, you can’t guarantee you aren’t being sold products you don’t really need or that you aren’t being used to fatten someone else’s wallet.
Watch Why Working with a Fiduciary Is CRITICAL to Your Financial Future.
How to Know If You Are Working with a Fiduciary Advisor
If you are looking for a financial advisor, it is not only appropriate, but also wise to ask if they are a fiduciary advisor.
Even better – ask if the advisor is willing to sign a disclosure stating they are a fiduciary.
You can download a Fiduciary Pledge here.
Additionally, you can also view information about individual advisors and firms using the SEC Check Your Investment Professional Database.