Two Standards to Look for in a Financial Advisor

September 28, 2017

Mature couple speaking with business man

By Elaine Lee

You probably have spent your time working, raising children and maybe even caring for aging parents. You’ve put money away for retirement, saved for college and have emergency funds available. As you think about the future, though, there are nagging questions: Will I be able to live the lifestyle I’ve imagined without running out of money? Am I taking the right step to protect my family? Maybe it’s time to stop trying to do it all yourself and find a financial advisor who can help.

Finding a financial advisor can sometimes feel as stressful as finding your spouse. How do you know who to trust with such an important part of your life? If you’re just beginning your research, don’t sweat. Start by understanding two important legal standards regulating how financial advisors provide advice: the fiduciary standard and the suitability standard.

The Fiduciary Standard

In today’s world of financial services, not all advisors are created equal. When you’re ready to seek financial guidance, don’t just assume the advisor always has your best interests in mind. To understand the importance of the fiduciary standard, you must first understand the definitions of standards required by law. The fiduciary standard obligates advisors to put your interest before their own. Fiduciary advisors recommend solutions and strategies that are most likely to help you reach your goals and are consistent with your risk tolerance and objectives. Advisors that work under a fiduciary standard must disclose any conflict of interest and adhere to the duty of care and loyalty to you. They also are usually completely transparent about their compensation.

The Suitability Standard

In contrast, the suitability standard only requires advisors to suggest investment products that are suitable to your circumstances regardless of your goals. Also, there is no requirement for the advisor to avoid any conflicts of interest, allowing them to recommend suitable financial products that may provide the advisor with higher personal compensation than other suitable products. In fact, advisors employed by broker-dealers, insurance companies and other firms operating under the “suitability standard” can lawfully sell their clients an investment product that may be suitable whether or not it is in their best interest. Advisors adhering to the suitability standard are also less likely to fully disclose their compensation structure. This is because they are compensated in a variety of obvious and non-obvious ways including commissions, production “credits,” trailing fees and even trips or contests for selling a certain product in high volume.

There are wonderful advisors and poor advisors that work under both the fiduciary and suitability standard. Pending Department of Labor rules will require all financial advisors to be fiduciaries on retirement accounts – but no other aspect of your life. If your primary concern is trust, you might be best served searching first for advisors that legally work under the fiduciary standard at all times. This standard not only prevents conflicts of interest when recommending investments, but it is a great way to assure trust between you and the person helping you reach your financial goals.

Are you looking for more ways to understand how and when to choose a financial advisor? Download our new learning paper.