What Kind of Financial Advisor Do You Have? A Distinction That Makes a Difference

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Have you seen the ad from Charles Schwab that depicts the curious son with the dumbfounded dad talking about wealth management? I agree with the ad's premise that if you aren't asking some pretty basic questions of your financial advisor, then you probably aren't getting the service you need to protect and grow your wealth. However, the ad is missing something — It doesn't deal with one of the most important questions to ask your potential financial manager: whether they are a “suitability” broker or “fiduciary” advisor? 

Now, I know words like “suitability” and “fiduciary” sound like financial mumbo jumbo. But when you're picking the right person to manage your money, it is a critical distinction. 

“Eighty-five percent of investors who use an investment adviser have not heard of or don't understand the difference between a fiduciary standard and a suitability standard.” – Journal of Financial Planning

First, suitability advisors are financial brokers who earn a commission and are held to a less lower legal standard — they must steer you toward investments that are “deemed suitable,” whereas fiduciary advisors are fee-only financial advisors who are held to a very high standard and must act in the best interest of their clients always.

While both of these advisors appear to provide similar services, the standards and regulations they are held accountable to are vastly different and can significantly impact your experience as a client. While there have been movements in the past to consolidate both types of advisors under a single regulatory system, as detailed in this study by the Securities and Exchange Commission (SEC), they have not so far been successful. Let's dig a little deeper into each one.

Suitability Advisors: Acting in the Best Interest of the Institution

Suitability advisors are expected to ensure that an investment is suitable for their client, but they are not required to ensure that the investment is in the client's best interests. They cannot knowingly suggest investments that they know to be harmful to the client. The investments do have to meet the bare minimum of being suitable to the client's portfolio. However, a suitability advisor can recommend products for the client that may not have the best growth but instead will yield the best results for the company that the advisor works for.

As Ryan C. Fuhrman writes in Investopedia:

“The SEC does make certain distinctions [for suitability advisors], such as considering them financial intermediaries who help connect investors to individual investments. It details that a key role is to enhance market liquidity and efficiency, by linking capital with investment products that range from common stocks, mutual funds and other more complex vehicles, such as variable annuities, futures and options.”

This doesn't mean a suitability advisor doesn't have a vested interest in performing well. They can still lose clients if they fail to perform. It simply means that a suitability advisor's primary goal is to enrich their institution rather than their client. It's a question of loyalty.

Fiduciary Advisors: Acting in the Best Interest of the Client

Fiduciary advisors are held to the what is called “the fiduciary standard.” They are required to always take actions that will be in the client's best interests, regardless of their own personal interests. For example, a fiduciary advisor is not be able to recommend a client make a specific investment simply because this investment would garner the advisor a higher commission rate or funnel more fees towards their company. They are only able to recommend investments based on whether the investment is the best possible investment for the client. 

The full fiduciary standard, as written by The Institute for the Fiduciary Standard, includes:

Six key fiduciary duties [which] embody the fundamental elements of an investment fiduciary’s responsibility.

These duties are:

  • Serve the client’s best interest
  • Act in utmost good faith
  • Act prudently – with the care, skill and judgment of a professional
  • Avoid conflicts of interest
  • Disclose all material facts
  • Control investment expenses

These standards of client care are enforced through relatively stringent regulations, which suitability advisors are not held accountable to. This doesn't guarantee that a fiduciary advisor will always yield more positive results than a suitability advisor; that will depend not only on the advisor's role but also on their skill as an investor. 

While it may seem as though a fiduciary advisor is always the best choice for an investment advisor, it's true that there can be exceptions. Choosing an advisor is a complicated process, and there are many factors that could play a part; an excellent suitability advisor may perform better for an individual than a middling fiduciary advisor, regardless of their principle focus and the relevant regulations. Still, it's important for an investor to be aware of the differences between these two types of advisor so that they can make an educated decision when entrusting an advisor with their financial future.

Our Commitment to You

At Lindsey & Lindsey, we are independent, Certified Financial Planners, who serve our clients interests under the fiduciary standard. We are proud to be able to recommend products and investments tailored exclusively to the unique circumstances and goals of our clients, never to suit our own needs. Our satisfaction and our compensation is a result of your success, not of meeting a quota or selling a specific product. We believe this allows us to provide the best service possible and build successful and long-lasting client relationships that are based on trust and loyalty.