Fiduciary and Suitability Standards - Should It Matter to Me?
Knowing the difference between the Fiduciary and Suitability Standards is necessary when you’re in the market for a financial advisor.
You’ve earned your money. You deserve someone you’re comfortable with to help guide your investing decisions and watch over your portfolio. There’s no reason to settle for anything less than a company that upholds their ethical values with a sense of pride.
The best financial advisors have a passion for helping clients formulate investment strategies so they can access high earning potential. Simply put, these professionals put YOUR needs first.
There’s a lot to put on your investigative checklist when you’re seeking a financial advisor, but “Fiduciary and Suitability Standards” should be at the very top.
While these words may not move mountains, they could greatly impact the level of care you receive.
Fiduciary and Suitability Standards – What’s the difference, anyway?
Fiduciary Standard
Registered Investment Advisors (RIA firms) are required to act in a fiduciary capacity. When advisors commit to the Fiduciary Standard, they are required – ethically and legally – to provide services that deliver the highest level of care. This includes:
- Always putting client interests first
- Always providing advice that suits clients best
- Always avoiding conflicts of interest
- Always disclosing all fees up front
- Adopting a Code of Ethics
The Fiduciary Standard is regulated by the Securities and Exchange Commission (SEC), under the Investment Advisors Act of 1940. This law requires an advisor to act in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest.
RIAs must register with the SEC or with their state regulatory authority. These advisors must also be completely transparent about fees, which means to fully disclose all fees they intend to charge along with a breakdown of how any such fees have been established.
Suitability Standard
The Suitability Standard is regulated by the Financial Industry Regulatory Authority (FINRA) and allows advisors to make suitable recommendations for their clients.
Advisors operating under the Suitability Standard may provide services with their clients’ best interests at heart, but they aren’t required to act in the same way as if they were held to the Fiduciary Standard.
Investment advice must appear suitable for a client’s present situation, but there is no way to ensure these advisors are delivering the same high level of care that fiduciaries can offer (even if they believe they are).
Furthermore, the suitability standard does not require advisors to disclose all fees upfront. It also does not have any restrictions on conflicts of interest.
Fiduciary and Suitability Standards: 5 Key Differences
1. Client’s Interest
Under the Fiduciary Standard, advisors must place their clients’ interests first, always. This means that recommendations can only be made after thorough research. The Suitability Standard only holds consultants accountable for providing suitable advice for clients.
2. Conflicts of Interest
The Fiduciary Standard requires advisors to avoid any conflicts of interest. If advisors are truly putting their clients’ interests first, they cannot expect to benefit from any advice or actions they execute on behalf of their client. They must also disclose any conflict, or potential conflict, to the client.
The Suitability Standard actually allows advisors to recommend investments or strategies that are beneficial to them, as long as they are still suitable for a client’s needs.
3. Fees
The Fiduciary Standard requires advisors to disclose all fees upfront. They must also provide a complete breakdown of how they arrived at the fee structure.
The Suitability Standard allows advisors to charge any fees they deem appropriate.
4. Regulatory Bodies
The Fiduciary Standard is regulated by the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. The Suitability Standard is regulated by the Financial Industry Regulatory Authority (FINRA).
5. Advice
The Fiduciary and Suitability Standards both require advisors to provide financial advice that benefits their clients. However, only advisors held to the Fiduciary Standard are required to provide unbiased recommendations that are custom-tailored to the client’s individual needs and financial situation.
The Suitability Standard does not require advisors to provide personalized advice at such a high level. Rather, it allows advisors keep a balance between the client’s needs and their interests.
Yes, EXOS is held to the Fiduciary Standard.
We believe investors should work with fiduciaries if they want the full benefits of having a financial advisor. At EXOS, we see our fiduciary duties as a pact rather than a responsibility. We put our clients’ best interests first at all times because helping people achieve financial freedom is our passion.
Whether you are planning to begin your financial journey or seeking a firm that commits to a higher standard of care, we’re here to help. Contact us today.
