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Selecting An Advisor: "Suitability Standard" or "Fiduciary Standard"

The ambiguity of financial advice among the public can create confusion when selecting a financial advisor. 


“Fee-Only” advisors believe that a "fiduciary standard" is the very best framework for professionals to work with clients.    To act as a fiduciary means an advisor has to put aside his/her own financial interests, and also put aside the business/financial interests of any company they work for, and give recommendations that are solely and completely in the best interests of their clients.


 In contrast, the majority of financial advisors are paid by commissions and don’t adhere to a fiduciary standard.  Rather, they’re held to a “suitability” standard, meaning they’re supposed to reasonably believe that the investment and insurance products they want you to buy are appropriate for your situation.  These other advisors often work for large financial services firms, known as Broker-Dealers. The loyalty of these advisors is to their employer, not their client because they are required by federal law to act in the best interest of their employer, not in the best interest of their clients.


  In the Wall Street Journal column titled “Brokers Win, Investors Lose Key Reform”, Jason Zweig writes “Securities salespeople generally aren't obligated to act in your best interest. They needn't tell you that they make extra money pushing one particular investment or that cheaper alternatives might provide you a higher return. Suppose two mutual funds are "suitable," but one of them pays the broker a fatter fee. You may well end up in that one—without finding out that your broker had an incentive to favor it.”


Important Questions To Ask of ANY Financial Advisor:


  • Do you have a legal fiduciary obligation to act in my best interests? This draws the line in the sand that separates those who sit on your side of the table and have a legal obligation to act in your best interests and those who sit on the other side of the table and have no such obligation.  
  • If so, do you have a fiduciary oath or pledge that you will sign? 
  • Will you provide written disclosure prior to our engagement, and thereafter throughout the term of the engagement, of any conflicts of interest, which may compromise your impartiality or independence?
  • Do you receive any compensation or other remuneration that is contingent on any purchase or sale of a financial product? 
  • Do you receive a referral fee or other compensation from another party based on a referral of a client or a client's business?


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Comment   |  7 years, 8 months ago from Conyers, GA