Many investors assume their financial advisor makes recommendations based on their best interests. Unfortunately, that’s not always the case. Many advisors are only required to recommend what is suitable, not what is best for their client.
There are two investment regulatory standards: Fiduciary & Suitability.
If your advisor adheres to a Suitability Standard, they can guide you into any product that may not be the best for you but still meets the basic criteria for your account. Under the Suitability Standard, it is more common for the advisor to focus on their personal income over the need of the client as long as the client is not being hurt.
A Suitability Adviser must meet the client’s basic needs by following the listed standards:
- Recommend an investment this is suitable but is not necessarily consistent with the client’s objectives and profile.
- Execute orders promptly with favorable terms, determined through “reasonable diligence”
- Charge reasonable prices for the current market
- Disclose material information
- Disclose any conflicts of interest but not at the same level as required for a Fiduciary Standard
The Fiduciary Standard was created in 1940 as part of the Investment Advisors Act. It is regulated by the Securities Exchange Commission (SEC) and states that investment advisors are bound to a standard that requires them to put their client’s interest above their own.
The following rules fall under the Fiduciary Standard:
- Put their clients’ best interests before their own, seeking the best prices and terms.
- Avoid conflicts of interest and disclose any potential conflicts of interest to clients.
- Do their best to ensure the advice they provide is accurate and thorough.
- Is prohibited from buying securities for his or her account prior to buying them for a client.
To further invest in their clients, advisors have the ability to achieve accreditation related to their fiduciary commitments. The Accredited Investment Fiduciary (AIF®) Designation assures clients that their advisor has a fundamental understanding of their fiduciary duty, the standards of conduct for acting as a fiduciary, and a process in place for applying their fiduciary responsibility.
WHAT YOU CAN DO
When interviewing an advisor, it is always best to be up front and honest. Ask specifically if they are a Fiduciary Advisor. Have them explain their fees and how they charge for services. Ask them to explain how they make investment choices.
As an AIF® designated fiduciary, we help our clients make educated financial decisions with confidence. Contact us today to learn how we can serve you too.