Financial Advisor Standards: Fiduciary or Suitability
Financial advisers are held to one of two standards. One is the fiduciary standard and one is the suitability standard. This is true no matter what term they use to describe their services – financial planner, investment advisor, wealth manager, asset manager, and portfolio advisor are all potential titles that don’t necessarily indicate adherence to one standard or the other.
The best way to determine what standard a given advisor follows is to ask.
An advisor following a fiduciary standard will be regulated by the U.S. Securities and Exchange Commission (SEC) and held to the highest standard. Fiduciaries must put the financial well-being of their clients above their own. They must disclose any conflict of interest. They must also disclose all material facts about any investment and serve their clients loyally and with good faith.
An advisor following a suitability standard must recommend investments and other products that are suitable for their client’s stated goals and position in life. They are not, however, bound to put the financial well-being of their clients above their own or to disclose all material facts.
In other words, the investments and other products recommended to a retired widow with a stated goal of capital preservation must be suitable for the stage of life and situation. Suitability standard advisors are regulated by the Financial Industry Regulatory Authority (FINRA) rather than the SEC.
Both can sound reasonable, right? But there are many situations when the suitability standard would not provide service at the same level of quality. If a financial advisor following a suitability standard is a broker, for example, they could advise an investment that will pay them a higher commission than other, similar investments with a comparatively lower commission.
However, financial advisors following a fiduciary standard could not in good faith recommend an investment with a higher commission, because that would be placing their own financial best interests ahead of their clients.
Financial advisors working for brokerages and banks are likely to be paid at least in part on commission and other fees. They will be encouraged to recommend stocks and other products, such as insurance, that the brokerage or banks have positions in or sell. Their commissions and other fees are likely to be tied to selling these products.
In other words, financial advisors who follow a suitability standard may well be incentivized to recommend products that reward them and their employing institutions with relatively high commissions and fees and charge more.
In addition, of course, the stocks and other financial products they recommend may be limited to a specific product line. A fiduciary advisor, on the other hand, is not tied to a specific product line and thus has a larger range of stocks and other products to choose from when recommending strategies to clients.
At ARQ Wealth Advisors, we adhere to the highest fiduciary standards. In fact, we are the only Investment Advisory firm in Arizona that has adopted the Institute for the Fiduciary Standard’s Best Practices.
Fee-Only and Fee-Based Advising
Now, let’s return to fee-only versus fee-based advising. Fiduciary advisers work on a fee-only basis, while suitability standard advisors work on a fee-based basis. In a nutshell, that means you are charged commissions and other fees by suitability standard advisors, which opens the door to a conflict of interest between their financial interests and yours.
Fiduciaries are fee-only advisors paid directly by their clients, so no conflict of interest like that exists.
The fee may be charged as a flat rate, an hourly rate, or a percentage of assets under management (AUM). Some firms charge graduated rates for various levels of AUM. The structures are disclosed transparently to clients.
In addition to charging you more in commissions, the financial statements of suitability standard advisors may result in the fees being hard to understand.
How Can You Find a Fee-Based Fiduciary Advisor To Meet Your Needs?
How can investors find a fee-based fiduciary advisor? Some designations, like Registered Investment Advisor (RIA), indicate that holders of the designation are fiduciaries. Certified financial planners (CFP®s) are mandated to act according to a fiduciary standard per the CFP® Board.
The best idea is to ask a prospective financial advisor whether or not they are fiduciaries. This should be one of a number of questions to determine their suitability for you as a financial advisor. You also need to ascertain that you feel comfortable with the advisor and their approach, that they can explain concepts and principles to your satisfaction and that they have experience working with people whose goals and net worth are similar to yours. Ascertaining a similarity of goals and net worth means that the advisor will be experienced in the issues relevant to your situation.
Finally, you may want to consider choosing a financial advisor in the same geographic region as yourself. Issues of taxation, real estate and laws and regulations concerning wills and other estate planning issues can differ profoundly by region. A comprehensive financial advisor should be able to give you meaningful advice on all these categories.
Potential questions to ask a prospective advisor include the following:
- Are you a fiduciary?
- What is your fee structure?
- How many years of experience do you have?
- What certificates or designations do you possess?
- Are you a CFP?
- How often do you communicate with clients?
- Which firm will be the custodian of my assets?
ARQ Wealth Advisors has a team of experts who are passionate about helping you achieve your goals. Our team includes Certified Financial Planner™ professionals (CFP®s), Chartered Financial Analysts® (CFA), Retirement Income Certified Professionals ® (RICP), and Accredited Investment Fiduciaries ® (AIF).
Contact us today and start on a new path towards your financial goals.
