When it comes to financial advice, there’s the age-old question of whether you’re being told accurate information or whether the person giving you the information is trying to promote their own financial interests.
This can happen with stocks, estate planning, and many areas of finance and is one of the reasons research can be so difficult for the layman.
However, there are standards by which financial professionals should follow, this is known as the Fiduciary Standard and it is part of a law originally enacted in the 1940s.
In this article, we’ll explain the fiduciary standard and why it is so important when working with a wealth management expert.
The Fiduciary Standard Explained
The Investment Advisor Act, originally enacted in the 1940s, states that financial advisors must put their client’s interests above their own financial interests.
The main part of this standard is to avoid conflicts of interest. For example, if the financial advisor receives a larger commission for one investment over another, they may want to promote the investment that’s more lucrative to themselves. This can be a conflict of interest and a situation where the advisor is putting their own interests ahead of the clients.
Secondly, advisors must take the best course of action to implement their strategies, even if that works against the advisor’s own self-interests.
The Suitability Standard
When people hear about the fiduciary standard, they often hear about the suitability standard as well. These may seem similar, but there are key differences between the two.
The suitability standard means the advisor is just responsible for giving advice that is suitable for the client, not necessarily the best advice. This means the advice can still be of benefit to the advisor’s interests.
For example, promoting a high-commission product that suits the client is fine, even if lower-commission products exist that may work.
If an advisor was following the fiduciary standard, they should not consider their own commission when suggesting an investment vehicle.
In this way, the suitability standard is a lower standard that an advisor must follow.
Which Standard Does Your Advisor Use?
This is a key part of the different standards in place for financial advisors that investors should understand.
Registered investment advisors must follow the fiduciary standard by law. If they do not, and it can be proven, they can face fines and penalties.
Brokers and dealers only need to adhere to the suitability standard, the lower of the two standards. This is true even if they purport themselves to be financial advisors. This can cause a tricky conundrum for clients who may not be aware of this subtle difference.
Thankfully, you can simply ask your advisor which standard they follow. They are legally required to answer your question, and an advisor that follows the fiduciary standard will be happy to answer you.
This doesn’t mean brokers and dealers following the suitability standard are bad and can’t provide good service. It simply means that these are different advisory roles that customers need to be aware of to ensure they receive the most trustworthy advice for their situation.
ICCNV is an award-winning financial advisor located in Nevada. Both the Wall Street Journal and Barron’s have recognized them as the #1 financial advisor in Nevada for 8 consecutive years.
