The fiduciary standard is one of the more misunderstood and misquoted obligations in financial services. Many financial advisors would say they take on a fiduciary duty. At the same time, many advisors are not truly bound by the standard.
The word fiduciary sounds reassuring to the potential client. It seems like anyone who takes on the licensing and title of financial advisor or financial planner would naturally be a fiduciary.
However, there are two standards under which advisors can act: the fiduciary standard or the suitability standard.
Here’s a few ways the term fiduciary has been defined:
Investopedia says: A fiduciary, in any context, is a person who is ethically or legally obliged to act in the best interests of another party.
Wikipedia says: A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons).
Nerd Wallet says: A fiduciary is an individual or organization who has a legal duty to act in the best interest of someone else. Fiduciaries have a bond of trust with clients and must avoid conflicts of interest. In finance, fiduciary financial advisors must only recommend investments and other financial planning products that are the best fit for their clients.
The CFP® Board has set the standard, literally, that requires “at all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client.” Then, they go on to list the duties owed to clients by the CFP® professional; click here to see more.
Because there are two standards, a non-CFP® professional can to act under the suitability standard when providing advice. As stated above, CFP® professionals must act under the fiduciary standard at all times when providing financial advice.
Here’s a few ways the suitability standard has been defined:
Seeking Alpha says: The suitability standard requires brokers and investment advisors to recommend investments that are suitable for the client. However, they are not required to act in the best interests of the client; whereas a fiduciary is required to place their clients’ best interests ahead of their own.
Investopedia says: Broker-dealers have to fulfill what is called a “suitability obligation,” which is loosely defined as making recommendations that suit the best interests of their client. Some broker-dealers feel this is unfair as it may affect their ability to sell investment vehicles that benefit their bottom line, but all a suitability obligation means is that the broker-dealer needs to believe that the decisions they make truly benefit their client.
FINRA says: a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.
Smart Asset says: Those who conform to the suitability standard just have to make sure their recommendations are suitable, given the client’s age, goals, resources and other factors.
Can you spot the glaring differences between the fiduciary and suitability standards?!
Simply stated: it’s important to work with a fiduciary advisor because you don’t know what you don’t know.
Under the fiduciary standard, the requirement for recommendations and disclosure is significantly higher than under the suitability standard. This is not to say that advisors acting under the suitability standard are not also acting in the client’s best interest.
However, the leeway for these non-CFP® professional advisors to choose is the most important distinction.
Want to hear more on this topic?
Listen to the full Financial Purpose podcast episode here: Episode 15 – Is your advisor a fiduciary?
Watch the video version of this episode:
Life Moves Wealth Management is a registered investment advisor offering advisory services in the States of Arizona and Indiana, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.
The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.
HYPERLINK DISCLOSURE – The information being provided is strictly as a courtesy/convenience. When you link to any of the web sites provided here, you are leaving this website and assume total responsibility and risk for use of the web sites you are visiting. We make no representation as to the completeness or accuracy of information provided at these websites. Life Moves Wealth Management is not liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technology, web sites, information and programs made available through this website. Life Moves Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Life Moves Wealth Management’s web site or incorporated herein, and takes no responsibility thereof.
Author: Dale Shafer II, CFP®, APMA®, CDFA®
This website uses cookies to make sure you get the best experience on our website. You can find more information under the Privacy Policy.
