Most investors are not aware that there are two standards of care in the financial services industry: the fiduciary standard and the suitability standard.

The fiduciary standard

The fiduciary standard requires that an advisor place the client’s interest first. This is the standard that is adhered to by Registered Investment Advisers (RIAs) and is enforced by the Securities Exchange Commission (SEC).

The suitability standard

The suitability standard requires that a broker makes recommendations that are “suitable” based on a client’s specific situation. The key here is that this standard does not necessarily require the recommendation given to be in the client’s best interest. Brokers, or registered representatives, are held to this suitability standard which is enforced through a self-regulatory organization called the Financial Industry Regulatory Authority (FINRA).

Some questions to consider....

What are the drivers behind the advice you are given?
Does the advice you are given place your interests first or is the advice given to you just “suitable”, while not necessarily placing your best interests at the forefront?

Let’s put these differences in action – have you ever been in the market for a new vehicle? Purchasing a vehicle can be a daunting process. While assessing the market place and not having a complete grasp on all of the models and options, you decide to go to the nearest Ford dealership as you know they are a trusted brand. The salesperson asks you to describe what you are looking for in a vehicle.

After some discussion about your needs, the features you outline would be highly correlated to a Honda Pilot, however, the salesperson states that a Ford Explorer would meet all of your needs. In this situation the Ford Dealer is conflicted as he/she only sells Fords and will lose the opportunity for a sale.

Under the suitability standard, the client would potentially end up with a product that isn’t the best fit and potentially costs more than the product that is a better fit. What is even more disheartening is that the client is unaware that they were given advice that did not put their own interest first – a Ford dealer is not going to tell you to go down the street to another dealer even though another car may be a better fit. The salesperson makes the sale, makes a commission and you are left with a vehicle that is “suitable” for your needs but it not necessarily what is in your best interest.

Now let’s apply the suitability standard and the fiduciary standard directly to the world of investing. From a suitability perspective, a broker will meet with his/her client and determine what is suitable at a specific point in time. The sale is made and the prospectus is given. The legalese of the prospectus outlines that the fund that was sold is operated by the institution that the broker is employed at and there is a trailing fee on top of the commission the client pays.

Under a fiduciary standard, the picture is very different. All conflicts of interest must be disclosed. A fiduciary has a “duty to care”. What does this mean? The advisor needs to continually monitor not only the client’s investments, but also any changes to the client’s financial situation – changes to a financial situation can happen at any time. For fiduciaries, the first meeting is just the beginning and not viewed as one traction – regular “check-ins” are instrumental to the financial planning process.

When selecting a financial advisor take nothing for granted. It is crucial to verify that your advisor has your very best interests in mind. You need to trust your financial advisor. Regardless of which advisor you choose, ask if they are held to the fiduciary standard. Know what you are paying for! A good advisor will develop a plan that fits YOUR lifestyle. Lastly, be confident that your advisor has a solid philosophy and has experience applying it through changing market cycles. This should be your first concern—only after should you worry about the fees.

Remember, a broker focused on his or her next commission (without looking at the whole picture) could cause you financial distress! For further advice, reach out to me or any member of the KLR Wealth Management Team.