Fiduciary vs. suitability advisors: Do you know the difference? The differences between the two may wind up costing you and your investments, so choose wisely.
Have you ever wondered how financial advisors get paid? It’s a good question because the answer has the potential to affect your personal finances.
If you think all financial advisors are fiduciaries, they aren’t. Working with a fiduciary advisor is critical to your financial future because it’s all about you and what’s best for you – not the advisor.
A fiduciary is a person or organization that acts on behalf of a person or persons and is legally bound to act solely in their clients’ best interests.
A fiduciary manages property or money on behalf of someone else.
A fiduciary…
#1 Is required both legally and ethically to act in the client’s best interests and NOT for his or her own interest or the interest of a company.
#2 Must place YOUR interests first.
#3 Must disclose any conflict of interest upfront.
Fiduciary advisors must only buy and sell investments that are the best fit for you and your financial goals.
They get paid a fee or a percentage of the assets rather than a commission, which means there’s no clouded judgment when selecting the best product for your situation and goals.
Nor can they push a specific product on you just because it’s suitable, but offers them a higher commission. Should they breach their fiduciary duty, they are liable to be sued.
Anyone can call themselves a financial advisor. It’s a loose term that frequently gets thrown around.
But if a person charges for investment advice, they are legally required to follow one of these standards: A fiduciary standard or a suitability standard.
There is a HUGE difference between these two standards. And, they can have a huge impact on how your money is managed.
Fiduciary Standard: Advisors that operate under the Fiduciary Standard must put their clients’ interests above their own and adhere to the Investment Advisers Act of 1940.
They are regulated by the SEC or state regulators depending on the amount of assets they manage.
Suitability Standard: Advisors who work under the Suitability Standard do NOT operate as a fiduciary or adhere to the Fiduciary Standard. They are only required to give advice that is suitable for a client based on their financial needs and objectives. They are usually brokers or registered representatives of the broker dealer.
It’s as easy as asking your current advisor, “Are you a fiduciary?”
You can take it a step further and ask if the advisor is willing to sign a disclosure stating he or she is a fiduciary.
This is where the rubber meets the road. A fiduciary will glady sign. If an advisor steps back and asks why you want him or her to sign something, that’s a red flag.
There’s nothing wrong with doing it yourself. Nothing at all.
However, when it comes to your finances, your retirement, and your assets you want to leave to your loved ones, it’s advisable to speak with an expert.
Whether it’s a tax professional, estate planning attorney, and/or financial advisor, seek advice about the best ways to grow your wealth and protect your finances.
It depends on whether or not the advisor is a fiduciary.
A fiduciary advisor should tell you exactly – and in clear terms – how he or she is compensated.
Fiduciaries either charge a flat fee or receive a fee for the percentage of assets. This puts them on the same side of the table as you.
If an advisor gets a commission, he or she only has to find a product that’s suitable for you. This may create a conflict of interest because the advisor may be inclined to choose a suitable product that offers a higher commission.
If you ask an advisor how he or she is paid, and the response is, “My company pays me, so you don’t have to,” this means the advisor is being paid a commission on the product.
If the advisor is an independent fiduciary, legally, he or she must recommend the best available products for you.
If the advisor works for a firm, you have to decide if there is a conflict of interest – as the advisor may be inclined to, or have to push the firm’s own proprietary products, some of which may have higher fees.
Some firms have a commission-based side of their business and a fiduciary side. These are often referred to as hybrid firms.
The question you need to ask a fiduciary who works for a firm is this: When you choose my investments, are you wearing the fiduciary hat that puts my interests first or the suitability hat, where the loyalty lies with the firm?
As the consumer, you need to feel that level of trust.
Remember, you are building a long-term relationship with someone you are trusting with your financial future. You have to feel good about it.