With the Madoff Ponzie scheme bilking billions out of investors, I thought it would be timely to explain two very important standards concerning financial advisors: Suitability and Fiduciary. 

Most people do not know that stockbrokers (officially referred to as registered representatives of the brokerage firm) and investment advisers (RIAs) have significantly different standards to follow. A recent study showed that 74% of investors, “were not aware that only RIAs have a fiduciary responsibility to act in investors best interests in all aspects of the financial relationship."¹ A fiduciary is someone who is required to be transparent in all their activities and to provide full and fair disclosure on how they are compensated and any potential conflicts of interest. 

According to the SEC, “investment advisers are fiduciaries."² However, most financial professionals are, “individual salespeople employed by brokerage firms” and are “generally not considered to have a fiduciary duty to customers.” Instead, stockbrokers are required to “recommend investments that are suitable for you… They are not required to provide up-front disclosure of the type provided by investment advisers."³

Can the suitability vs. the fiduciary standard impact your bottom line?  Absolutely!  For example, Liz Pulliam Weston of MSM Money⁴ wrote:

“Let's say you have $10,000 a year to save for retirement. Your financial adviser could recommend you invest the money in a low-cost index fund that might net 8% a year. After 30 years, you'd have over $1.1 million.

But let's say the adviser could earn a fat commission for recommending a higher-cost investment being promoted by his financial-services firm. So instead of netting 8% a year, you might net 6%. After 30 years, your nest egg would grow to just under $800,000, a difference of more than $300,000.”

So you are ready to work with a fiduciary-only advisor, but how are you going to find one? Unfortunately, unlike other professional fiduciaries such as physicians and attorneys, a financial advisor’s title does not tell all.

However, there are some simple straight forward questions that you can ask to find out if your advisor is committed to the fiduciary standard of care:

·         What are all of the costs associated with the relationship?

·         Do you receive compensation from other sources if you recommend that I buy a particular stock, bond, or mutual fund?

·         Will you disclose all potential conflicts of interest? 

A non-fiduciary will be reluctant to disclose how they are compensated, especially in regards to company commissions, referral fees, and other incentives.  

·         Are you legally obligated to act in my best interests at all times and are you willing to put that in writing? 

·         Are you a Registered Investment Adviser?

·         Will you provide me with your form ADV?

We hope this article helps you understand the difference between the “suitability” and the “fiduciary” standards and how they can impact your bottom line.  Inform and protect yourself by working with an investment fiduciary that puts your interest first.