Fiduciary vs. Suitability - Two Different Standards of Care
|Fiduciary vs. Suitability - Two Different Standards of Care|
Under a Fiduciary Standard, an advisor must always act in the best interest of their clients. The advisor makes recommendations as if they were the client, or the client were a family member. In fact, an advisor must disclose any conflicts of interest, disclose all of their fees and strive for reasonable investment costs.
Some advisors and brokers operate under a suitability standard of care. An advisor or broker just has to make sure that an investment product is suitable for a client based on the client’s financial needs, objectives, and unique circumstances. It’s not well-known but there are a lot of advisors who operate under both standards of care and switch between them. Sometimes they wear the fiduciary hat and other times they wear the suitability hat.
The suitability standard is generally for commission-based product sales, so any advisor or broker who earns commissions will fall under that standard at least some of the time. Fee-Based advisors can earn fees and commissions, so they are more apt to switch between the two standards of care. It doesn’t mean that Fee-Based advisors are unethical, or can’t always operate under the Fiduciary standard. It just means, they don’t always have to.
Most Fee-Only advisors work exclusively under the Fiduciary standard. However, the best way to know for sure is to have an advisor sign a Fiduciary Oath, where they specifically state that they will not operate under the suitability standard, and will only work with you under the fiduciary standard of care.