Mar 28, 2017

What is the standard of care I should expect of my advisor?

The complexities of the financial services industry are well documented. That’s why many investors navigate a path to financial well-being by seeking the services of a financial advisor.

However, even the most sophisticated among us can have a difficult time choosing an advisor we trust, one who has our best interests in mind.

Let’s face it: When selecting a financial advisor, investors are confronted with a dizzying array of options: banks, brokerages, wire houses and registered investment advisors, to name just a few. So, where to begin?

Perhaps one of the most overlooked yet critical factors when making such an important decision is the standard of care by which the advisor operates. In fact, there are two different standards by which advisors are defined: fiduciary and suitability.

Registered investment advisors, who are regulated by the Securities and Exchange Commission (SEC) and/or state securities regulators, must adhere to the Fiduciary Standard. Under this standard, fiduciaries must generally comply with the following in providing investment advice:

  • Act in the best interest of clients
  • Place the interest of clients ahead of their own
  • Provide full and fair disclosure of all facts
  • Fully disclose material conflicts of interest

Registered representatives of broker-dealers, which are regulated by the Financial Industry Regulatory Authority (FINRA), must adhere to the Suitability Standard. Under this standard of care, the advice provided must suitably fit the client’s investing objectives, time horizon and experience. The broker-dealer, insurance salesperson or certain advisors offering this standard of care must merely ensure that their recommendations are suitable based on a client’s personal situation, but not necessarily in his or her best interest.

The fiduciary standard is the way for clients to ensure their interests are being put first.

To illustrate the difference, a broker operating under the suitability standard of care could sell his or her firm’s proprietary products or recommend mutual funds that cost the client more or underperform similar investments so long as he or she met the basic measures of suitability. In other words, the suitability requirements would be satisfied simply if the investment strategy met the objectives and means of the investor. By contrast, those advisors operating under a fiduciary standard of care would be required to take into account the reasonableness of the fees and conflicts of interest, versus a more basic question as to whether the investment is suitable.

Those operating under the suitability standard may receive ongoing “soft dollars” from the investment they have selected or may choose to sell their own products over competing versions, which may come at a lower cost. The fiduciary, however, would be obligated to disclose such fees.

Under suitability, the financial planning “process” may consist of a single meeting to accomplish a client’s goals. However, with a fiduciary advisor, in general, the planning process is much more in depth to the extent that the advisor has a duty of care to the client and typically maintains and ongoing relationship to monitor not only a client’s investments, but also his or her changing financial situation.

Ultimately, then, when you choose a financial advisor, experience, responsiveness and integrity are of the utmost importance. At the same time, understanding whether your advisor is legally obliged to deliver the highest standard of care regarding the delivery of investment advice should play a big role. Setting aside all else, the fiduciary standard is the way for clients to ensure their interests are being put first.


Disclaimer: Worth magazine is a financial publisher and does not recommend or endorse investment, legal, insurance or tax advisors. The listing of any firm in the 2018 Worth® Leading AdvisorsTM Program does not constitute a recommendation or endorsement by Worth magazine of any such firm and is not based upon Worth magazine’s experience with, or prior dealings with, any advisor. The information presented for each advisor, including but not limited to any related profile, statistical data, presentation, report, commentary, recommendation or strategy, has been provided by such advisor without review or independent verification by Worth magazine. Any such information is the sole responsibility of the advisor. Worth magazine makes no representation or warranty as to the accuracy or completeness of such information, assumes no liability for any inaccuracies or omissions therein and disclaims responsibility for the suitability of any particular investment recommendation or strategy for any person. Nothing contained in Worth magazine constitutes or should be construed as any form of investment, legal, insurance or tax advice or as a recommendation to buy, sell, hold or trade any securities, financial instruments or assets. Readers are advised to consult their legal, financial, insurance and tax advisors prior to making any investment or pursuing any investment strategy. Past, model or hypothetical performance is not indicative of future results.

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