Fiduciary vs. Suitability Standards: Which Drives Your Financial Advisor?

In December 2009, one of the top American pizza restaurant chains decided to hit the reset button by revamping their pizza recipe, one big ingredient in particular. They broke the news during a Monday Night Football commercial spot and exclaimed, “Our pizza is now made with REAL cheese!”

Despite its obvious message of a positive and a celebratory upgrade, the only reaction I remember was thinking, “It’s just NOW being made with real cheese? What exactly have we been eating for the past 20 years?” It’s unsettling when a simple truth is freshly revealed while it was presumably there all along.

As most of us expect high quality, healthy ingredients in the foods we eat, we also expect an equivalence in our relationships, especially long-term professional relationships. Just as the FDA and US Department of Agriculture regulate our food, the state security regulators and the Securities and Exchange Commission (SEC) regulate a unique type of financial professional known as a “fiduciary.”

As upsetting as it was to learn the truth about the cheese, it’s more unsettling to understand that not all investment advisors are legally required to act in the best interest of their clients. It’s perfectly normal to assume that the biggest reason someone would work with an investment advisor is that they want a professional guiding them with diligence and integrity.

Unfortunately, a concerningly large number of folks are unaware that, with respect to investing, all financial professionals adhere to one of two standards: fiduciary or suitability.  

Read on to understand the difference between the fiduciary and suitability standards and the importance of choosing a fiduciary when selecting an investment advisor.

Fiduciary Standard

The Department of Labor’s definition of a fiduciary demands that retirement advisors:

  • Act in the best interests of their clients
  • Put their clients’ interests above their own
  • Disclose all fees and commissions for retirement plans and retirement planning advice

It leaves no space for advisors to cover any potential conflict of interest.

Suitability

Simply put, the suitability standard allows advisors to not be obligated to put their clients’ interests first and is a much lower legal hurdle to clear than a fiduciary.

In other words, a non-fiduciary is legally allowed to sell you the branded product or investment that pays them the highest commission so long as it’s considered suitable.

In My Experience

For illustrative purposes, I’ve been on the receiving end of this type of harmful transaction.

Before I left for college, I needed to buy a cheap, beginner guitar for an upcoming class. While at the music store, I fell prey to a salesman who was only pretending to listen and care about my list of needs. He was incredibly charismatic and with all his wit and charm on full throttle; he eventually convinced me to buy a guitar that cost four times greater than the budget I had set.

In his mind, he sold a guitar to a customer who wanted a guitar. That’s all that is really needed to be deemed a suitable transaction. But behind the curtain, he received a much higher commission since he pushed the more expensive option to an uninformed, easily impressionable kid with some money to spend.

You may think this story is harmless, but the real horror is this same form of guidance and salesmanship happens every day with advisors who hold this lower legal standard.

Oakmont’s Standard

Here at Oakmont, we are an independent advisory firm that provides personalized financial advice to our clients.

We are Independent Registered Investment Advisors (RIAs). Therefore, we’re not tied to any proprietary product, family of funds, or investment vehicles.

As fiduciaries, we’re held to the highest standard of care and are always mandated to act in the best interests of our clients.

We believe in the fiduciary standard, are proud to operate within its confines, and expect all professionals in this industry to function by these high legal standards.

Bottom Line

Be as bold as you’re comfortable being and ask your current or prospective advisor:

  • Are they a fiduciary?
  • How are they licensed?
  • Are they “fee-based” or “fee-only?”
  • How do they get paid?

Our wealth is our work and it’s too important to be placed in the hands of an unprincipled charlatan wanting the big commission.

If you’re ready to connect with a fiduciary advisor, schedule a call with a member of our team or contact us with your questions.

-Written by Michael Hicks, Associate at Oakmont Advisory Group

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