Recently we received an inquiry from a client regarding the suitability vs. fiduciary debate. Jeff sent the client a message and I felt compelled to share it with a few comments here.
    
Before we get to that though, what is a fiduciary and why should you care? Most advisors are brokers, and as such they are held to what is called a suitability standard. This means that as long as they can prove the mutual fund, insurance product or investment they sold a client is suitable for that client then they have met their obligation. A fiduciary is held to a higher standard. As a fiduciary, any recommendation we make to our clients must not only be suitable, it must also be in the client’s best interest.  Specifically, if an investment pays a large commission and a reasonably similar investment does not, a fiduciary is obligated to purchase the one with a lower cost while a broker can elect the instrument that pays the most.  Most people assume their advisor is a fiduciary but in actuality the vast majority of financial advisors are brokers. 

Here is what Jeff sent out: 

The proposed change to the governing rules is being opposed by Broker/Dealer firms afraid of the necessary disclosures and fiduciary standards that ALL investment professionals should be held accountable to.  These Broker/Dealer firms are fearful of the increasing transparency regarding fees passed onto the client.  They are also fearful of losing their “suitability” standards, which allow brokers (read sales reps) to sell products and services to clients at very high expenses, select funds that benefit the parent company more than the investor, and overall open up potential liability to the sales rep for not acting like a fiduciary.

To be clear, a fiduciary is legally bound, like an attorney or a CPA, to do what is in their clients BEST INTEREST.  A suitability standard allows a broker to hide behind “suitability” rules to protect themselves from liability for bad decision making, price gouging, hiding fees, etc.  Who wouldn’t want the company and person in charge of the investment side of the business to be held to the fiduciary standard?  Yet the industry opposes this move.

My recommendation is to run from companies where they are clearly defending their own turf at the expense of their trusting clients.

For more information on the suitability standard vs. the fiduciary standard look here or at the CFP website for the CFP Boards comments on the topic.    

I am a CFP ® so I tend to side with them regarding the rules governing clients interactions.

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