- Posted August 26, 2015 by
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Retirees Should Know the Difference Between Fiduciary and Suitability Standards When Hiring a Financial Advisor
The title “financial advisor” applies broadly, but it is important to dig deeper to find out which standard an advisor follows before hiring him or her. Currently, only independent registered investment advisors are required to act in a fiduciary capacity, acting in the best interest of the investor. Brokers or “financial advisors” working for a broker-dealer firm are only held to a suitability standard, matching products offered by the company to the client.
During the past 18 months, there has been much media focus on the Securities and Exchange Commission’s (SEC) attempts to implement a uniform fiduciary advice standard. If the SEC effort succeeds, the fiduciary standard of registered investment advisors would be extended to broker-dealer channels. This uniformity would require broker-dealers to act in the best interest of the investor, which is not currently the case.
The standards followed by registered investment advisors were established 75 years ago as part of the Investment Advisors Act of 1940, which states that the fiduciary advisor is prohibited from making trades based on higher commissions for the advisor or their firm. Fiduciary standards are regulated by the SEC or state securities regulators, and hold advisors to a standard that requires them to put their client's interests above their own.
According to Jason Biance, Principal of a Florida-based registered investment advisory firm, the fiduciary advisor must also do all they can to make sure that their investment advice is made using accurate and complete information, and most importantly, avoiding any potential conflicts of interest.
Non-fiduciary broker-dealers, on the other hand, regulated by the Financial Industry Regulatory Authority (FINRA) need only fulfill a suitability obligation, a standard that does not require placing the client’s interests above their own. Although the language in the two standards seems to carry similar meanings, the differences between a fiduciary responsibility and a suitability standard are weighty.
Instead of bearing the responsibility to place the client’s interests above his or her own, the broker-dealer operating under a suitability standard must only believe that any recommendations made are suitable to meet their client’s financial needs, objectives and individual circumstances.
“The key distinction boils down to accountability,” Biance says. “When a person walks into the office of a registered investment advisor, they should feel secure in knowing that by law, the advisor works for the client’s best interest, not his own. This is similar to the fiduciary duty required of an attorney.”
A fiduciary also has a duty to continually monitor their client’s investments as well as their changing financial outlook. For instance, a client’s risk tolerance may change after going through a difficult bear market, or a tragedy causes the client’s medical expenses to escalate. Fiduciaries approach the first client meeting as only the beginning of the advisor’s legal obligation.
When it comes to selecting a financial advisor in the current system, investors who know the difference between fiduciary and suitability standards are already operating at an advantage. In addition, a quality financial advisor will offer a customized plan to fit each individual’s needs, a solid philosophy and a proven track record.