What’s the difference between fiduciary vs suitability standard of care? Its a legal battle that’s been going on since the recent debt crisis and involves the single most important criteria you should consider when choosing an adviser to help secure your family’s financial future. Who should you trust?
The Bottom Line
A fee-only Registered Investment Advisor (fiduciary) is legally obligated to put your interests before all others (including himself). The client and his/her needs are at the center of the relationship. The fee-only RIA does not sell products. Fee only advisers are usually experienced veterans of the industry who have opted to swim upstream against the industry norm, refusing to sell retail mutual funds, annuity products, life insurance, or any other commission based products that create a conflict of interest between them and their clients. Fee-only advisers often have all the licensing and credentials of their commission based counterparts, but are paid by you and serve only you with conflict free advice and portfolio management services.
Everybody else (suitability) is legally obligated to put their employer’s interest before all others, including yours. The employers’ objective is to sell financial products. All of their marketing resources, sales training, career incentives, and compensation system (commissions) are created and strategically aligned to sell products, not serve clients.
Why does it matter? The vast majority of the big name players in the financial services industry (brokers, banks, and insurance companies) will say it doesn’t matter, . . . that requiring everyone to meet a fiduciary standard of care will “deprive the investing public of flexibility in their investment choices”. Whut. . . ? And why shouldn’t they? Collectively, they spend billions of dollars a year on marketing materials, TV/WEB advertising, and sales training for the primary purpose of building trust. Once you trust the company, agent, adviser, sales rep., you willingly become dependent on him/her for financial “advice” and and generally follow it (ie., buy whatever they are selling). Their “advice” is a carefully scripted, multi-step sales process supported by bright colorful “financial illustrations” created by the multi-billion dollar sales machine described above for the exclusive purpose of generating revenue from commissions.
Most people think their advisor is a fiduciary. Aside from the usual son-in-law, uncle, college buddy, golf partner, or good ole boy bias that that often precedes the financial adviser relationship (sales training), most people tend to mentally assign the characteristic of fiduciary responsibility to anyone they have decided to trust with their money, whether that trust is misplaced or not.
To further muddy the water, the marketing benefit of being able to claim fiduciary obligation while side-stepping the responsibility for it is not lost on the industry marketing machine. Many RIA firms routinely call themselves “fee-based” advisers and still sell retail mutual funds, annuities, life insurance, and all the other commission-based products, skirting the fiduciary responsibility by disclosing the conflict of interest. That disclosure is sometimes verbal, but most often is buried in the mountain of paperwork that nobody reads and is usually referred to by the adviser as “bedtime reading material”. Almost all of the big brokerage firms have an RIA subsidiary. Sales reps are dually registered as IARs (Investment Adviser Representatives), RRs (Registered Representatives), and are appointed as agents of the insurance companies that the broker dealer has selling agreements with.
The following is a short video that describes the issue very well.
Many financial products serve a valid purpose for investors and everyone needs to manage risk. Sometimes risk is most appropriately managed with insurance products, but often is is not. Pros and cons of mutual funds, annuities, and life insurance is a subject for another post.