Most people we meet aren’t aware of the existence, let alone the differences, between what is called the Fiduciary Standard and the Suitability Standard. What are they, why do they matter, and why is our company held to the Fiduciary Standard, and not the Suitability Standard?
One of the most important parts you should be aware of concerns fees. Specifically, the Suitability Standard has some weaknesses that invite conflicts of interest. When you have a financial advisor that operates under this standard, he or she could, hypothetically, have you invested in a stock mutual fund that pays a 5.75% sales charge (called a “load,” a commission that is earned by the advisor), while bypassing a similar product that pays no sales charge. What this does is enrich the advisor at your expense, particularly because research shows that high expense funds underperformed low expense funds.
Rick Ferri has a good story that illustrates the differences vividly:
“When I was a broker during the 1990s, the firms I worked for encouraged us to sell their proprietary mutual funds. Many competing funds were more appropriate and lower cost, but we were told to recommend in-house funds first.
This sounds improper, but it is not a breach of the suitability standard that governs a broker’s advice. The liberal suitability standard allows a broker to sell in-house financial products as long as the broker can show that they are suitable for a client based on the circumstances. However, being suitable for a client is decidedly not the same as being the best available choice for that individual.
By law, a broker is not a Registered Investment Adviser (RIA), so they do not fall under the stricter fiduciary standard that RIAs must follow. The fiduciary standard is a much higher standard of care than suitability. As described by the Securities Industry and Financial Markets Association (SIFMA), “Fiduciary duty includes both a duty of care and a duty of loyalty. … [T]hese duties require a fiduciary to act in the best interest of the customer, and to provide full and fair disclosure of material facts and conflicts of interest.”
Under the Fiduciary Standard, your advisor is obligated to always watch out for your best interest first and foremost, meaning that if a lower cost alternative existed for a certain product, that’s what you would be recommended, even if it meant not getting that commission. When that conflict is removed, the advisor that operates under the Fiduciary Standard doesn’t have his or her judgment clouded by the sales commission. That means the investment advice you’re getting has a greater chance of being free of bias and is being chosen for you based on its own merits, not because it pays the advisor more.
Investopedia also has a good article on the differences.
(See our “Why Parabolic?” post to learn more.)
• No Conflicts Of Interest: You get unbiased advice because we don’t sell commissioned products. Fee is 1% of AUM (learn more).
• Your Interests Come First: We are held to the Fiduciary Standard, not the Suitability Standard.
• Avoid High Expenses: Index funds have up to 90% lower fees than actively-managed mutual funds and outperform them over the long term. Don’t own them? You may be paying too much.
Contact us today at (619) 888-4070 or email us at firstname.lastname@example.org to get your financial future moving in the right direction.
Rainier Trinidad, CFA
San Diego and Coronado’s Fiduciary Financial Advisor
Parabolic Asset Management
206 J Avenue
Coronado, CA 92118
Investment Risk Disclaimers: (i) Investments involve risk and are not guaranteed to appreciate, and (ii) Past performance is no guarantee of future results.