Fiduciary vs. Suitability

Do you receive financial advice to the fiduciary standard of care or the suitability standard? It’s important to know!

Deciphering the “what’s what” and “who’s who” of today’s complex financial services industry can be difficult, even for the most financially sophisticated members of the general investing public. Two words, fiduciary and suitability, are critical in understanding the motivation behind the person offering you financial products or advice.

Recognizing the difference between the fiduciary and suitability standards may also help you to appreciate the level of care you receive from a trusted financial advisor. Although the distinction between the fiduciary and suitability methods of offering advice is rarely discussed by “broker-led” large financial companies, we feel it is essential for investors to know the difference.

A broker (the suitability standard):

  • Offers products for sale from a range of products carried by the company he or she represents
  • Is paid commissions calculated as a percentage of the amount of money invested into the product

An advisor (the fiduciary standard):

  • Offers “best advice” taking into account the needs of each individual client
  • Is paid a quarterly fee calculated as a percentage of the assets under advisement

WHAT’S WHAT

“What’s what” relates to the standard of care upon which financial advice is provided to the investing public:

The fiduciary standard requires advice to be provided in the best interests of the client including the disclosure of possible conflicts of interest.

The suitability standard states that a broker only needs to check the suitability of a prospective buyer, based primarily upon financial objectives, current income level and age, in order to complete a commissionable sale of a financial product. In a way, when a broker checks the suitability of a potential buyer, they are measuring how much financial product can be sold, not the needs of the investor. No disclosure of possible conflicts of interest is required. Common differences between the two standards involve trading commissions; for example commissions and incentives paid by mutual fund companies back to the broker dealer. These inter-company inducements can create conflicts between the investor’s requirements and the motives of the broker.

When a company suggests the purchase of a proprietary product, such as a mutual fund or an inventoried security, such as a bond, in the knowledge they will receive a direct and upfront commission, can that suggestion be relied upon to be fair for the advantage of the client?

Bottom line: a fiduciary advisor represents your needs. A suitability broker represents products.

WHO’S WHO

“Who’s who” involves understanding who the person offering you financial advice really represents. A fiduciary advisor provides advice on an independent, client by client basis. They represent the client, not the company. They receive a fee that is generally debited quarterly as a fractional percentage of the client’s managed asset values. Advisors and advisory firms are called this because they offer financial advice in the interests of the client.

A suitability broker is also known as a “Registered Representative” because they represent the broker-dealer for which they work. Often times, this “representation” involves loans from the broker dealer to the broker, which are forgiven based on total commissions generated. Brokerage firms are often called “shops” because they sell financial products in return for commissions.

Global Financial believes the fiduciary model of disclosure and transparency is in the “best interests of the client.”

WHY SHOULD YOU CARE?

The differences discussed above were a contributor to the 2008 credit crisis, especially within the selling of complex financial products based on housing debt. More recently, the initial public offering (IPO) of Facebook stock was roiled by alleged conflicts of interest by those offering the stock.

Every day, financial products are sold for a commission and include internal costs and fees that are difficult to find and define. The dollar value of these commissions and additional internal costs are usually deducted from the amount an investor invests in a financial product. The total return of such a product may therefore be reduced by the value of these hidden costs.

The diagram on the next page provides a general example of how the two different standards — fiduciary and suitability — may affect your relationship with the people and corporations you rely on for financial advice. Are you and your financial advisor both “on the same page?”

Since 2008, the U.S. Government has also begun to care about how financial recommendations are delivered to members of the general investing public. The lack of “self-policing,” protection of client interests and frequent scandals have led our legislative system to pass The Dodd-Frank Wall Street Reform and Consumer Protection Act.

One goal of this legislation was the creation of a single standard for financial advice based upon the current fiduciary standard.

What’s the difference between a fiduciary, fee-based advisor and a commission-based broker?

*The hypothetical chart shown above could be representative of any security or portfolio including bonds, stocks and other investments. It is intended as an illustration of a general concept and should not be considered a representation of actual performance, past or future.

Today’s financial industry offers its clients a wide range of options. In our eyes, every client deserves to have their needs put first and solutions offered according to those needs.

A Global Financial advisor can help you to understand these options and work with you to decide how they might impact your specific financial needs.

Prior to meeting with a Global Financial advisor, ask your current or prospective financial advisor if they are acting as a broker or an advisor.

Ask them to formally list all the areas in which they and their company can receive commissions. If they cannot or will not, we strongly urge you to consider whose best interests they have at heart.

Upfront commissions, hidden costs and murky fees cause an immediate and lasting reduction in investment returns.

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We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives.

Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claimspaying ability of the issuing company and are not offered by Global Financial Private Capital.

Investment Advisory Services offered through Global Financial Private Capital, LLC. Global Financial Private Capital, LLC, and Oxford Retirement & Estate Planning, Inc. (OREP) are not affiliated companies.