Suitability vs. Fiduciary StandardPrint This Page
Two words: Fiduciary and Suitability, are critical in understanding the motivation behind the person offering you financial products or advice. 90% or more of the financial services industry operates from the “suitability” standard. The suitability standard is the standard of client care held by “Registered Representatives” because they represent the range of products offered or created by the company they work for. They are paid a commission which is proportionate to the initial amount of money deposited into said product. The commission is not related to the success of the products.
The fiduciary standard, held by “Investment Advisors,” is one in which you are paying for advice that is by law, in your undivided best interest. In return for this advice, you usually pay a fee as a percentage of the assets under management. The advisor’s income is NOT based on which investments he/she direct you towards, it is based on the total amount of assets upon which advice is provided. Should your assets increase, so too will the amount being received by the advisor – you and the advice provider are, therefore, motivated by the same objective. The fiduciary advisor is also required by law to disclose any conflicts. Disclosing conflicts would put most suitability-driven Wall Street firms in a tough predicament since they create and profit from the product they sell and have many different ways to receive commissions from many different interested, but thinly disclosed, parties.
- Offers products for sale from a range of products carried by the company he or she represents.
- Is paid commissions calculated as a percentage of the amount of money invested into the product.
- Offers "best advice" taking into account the needs of each individual client.
- Is paid a quarterly fee calculated as a percentage of the assets under advisement.
WHY SHOULD YOU CARE?
The Suitability standard states that a broker only needs to check the suitability of a prospective buyer, based primarily upon financial objectives including current income level and age, in order to complete a commissionable sale of a financial product. In a way, when a broker checks the suitability of a potential buyer, they are measuring how much financial product can be sold, not the needs of the investor.
“Putting client interests first may seem like a simple concept, but its causing an uproar on Wall Street.”Wall Street Journal, December 2010
No disclosure of possible conflicts of interest is required. Common differences between the two standards involve trading commissions; for example commissions and incentives paid by mutual fund companies back to the broker dealer. These inter-company inducements can create conflicts between the investor’s requirements and the motives of the broker. When a company suggests the purchase of a proprietary product, such as a mutual fund or an inventoried security, such as a bond, in the knowledge they will receive a direct and upfront commission, can that suggestion be relied upon to be fair for the advantage of the client?