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Although much has been said lately about financial advisors owing their clients suitable recommendations, many investors do not realize that there are actually two "standards of care" in the financial services industry — and depending which one an advisor abides by, the advice that they provide could actually benefit them much more than it helps their clients. But as an investor, how can you tell the difference between the two?
One way to determine whether or not you are getting the most suitable and ethical advice from a financial professional is to work with an advisor who is a true fiduciary. Technically, a fiduciary is defined as being a person or an entity that acts on behalf of a person (or people) to manage assets.
In addition to offering this advice, a fiduciary also owes the person they are working for the duty of both trust and good faith — and they (fiduciaries) are ethically bound to act in their clients' best interest.
In addition, in many cases, no profit may be made from the fiduciary-client relationship unless there is explicit consent granted by the client at the time that the relationship with the advisor is started.
While there are numerous areas where fiduciaries are involved, fiduciary relationships are often found with legal, accounting and financial transactions, such as when a broker or financial advisor is responsible for managing their clients' assets.
On top of just simply ensuring that a client's assets perform well, though, fiduciary duty also involves ethical — and even some legal — components. Because of that, great care must be taken by the advisor in order to make sure that there are no conflicts of interest between the client and the fiduciary (such as the fiduciary having a biased and/or vested interest in a financial product they recommend for the client).
It is important to understand that not all financial advisors are true fiduciaries — even if they provide advice about investments and other financial vehicles that are considered suitable for their clients.
As an example, the suitability standard requires that a broker or a financial advisor make recommendations that are suitable, based on the investor's personal situation. However, this standard does not necessarily require that the advice be in the client's best interest.
| Fiduciary Advisor | Suitability Advisor | |
|---|---|---|
| Advice | Fiduciary AdvisorAdvisor is required to act in the best interest of the client | Suitability AdvisorAdvisor offers "suitable" advice |
| Regulatory Oversight | Fiduciary AdvisorSEC (Securities and Exchange Commission) or individual states | Suitability AdvisorSuitability Rule - FINRA Compliance |
| Revenue Generation | Fiduciary AdvisorFees for service(s) that are provided; the advisor must disclose and be transparent | Suitability AdvisorAdvisor may earn commissions and/or non-disclosed fees from investment firms and/or insurance companies |
| Conflict(s) of Interest | Fiduciary AdvisorAdvisor is required to identify and disclose any potential conflict of interest | Suitability AdvisorAdvisor is not required to describe or disclose a conflict of interest |
| Expenses / Fees | Fiduciary AdvisorAdvisor must consider the cost to the client | Suitability AdvisorAdvisor is not obligated to consider the cost to the client |
| Serving in the Client's Best Interest | Fiduciary AdvisorAdvisor is required to abide by the highest client best interest standard | Suitability AdvisorLower client best interest standard |
On the other hand, the fiduciary standard requires that an advisor put the interest of their clients first. This particular standard is adhered to by those who work for RIAs (Registered Investment Advisors) as IARs (Investment Adviser Representatives), and it is also enforced by the U.S. Securities and Exchange Commission. This includes being fully transparent and letting the client know about any fees or charges that they may incur if they move forward with a particular transaction.
It is important to know whether or not an advisor is a fiduciary — ideally before you start working with them. Some of the ways to determine this can include:
You could also ask the advisor to sign the NAPFA's Fiduciary Oath, which states that the advisor shall act in the following manner:
Choosing a financial advisor should be considered the most important "hiring" decision you'll ever make. That's because how you invest your money can have a tremendous impact on how — and how well — you retire.
In some cases, the financial products and plans that are recommended end up lining the broker or advisor's pockets much more than those of the investor or client. But working with an advisor who is a true fiduciary can help to alleviate that.
A fiduciary is required and expected to manage assets for the benefit of their clients — not their own personal profit. Therefore, fiduciaries may not personally benefit from the management of clients' funds.
Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.
