Fiduciary vs Suitability

What is the difference between a “Fiduciary Standard of Care” vs. a “Suitability Standard of Care”?
This important topic hasn’t been discussed very much in the public, mainly because it’s a difficult comparison to explain.  But it’s a topic that everyone should be made aware of.

A “Fiduciary Standard” of care means doing what is best for the client; namely, always putting the client’s interest before the advisors. It also means disclosing any possible conflicts of interest including compensation related to products or referrals.  Sometimes this type of advisor and compensation is referred to “being completely transparent”.

A “Suitability Standard” of care usually means an advisor need only suggest products that are suitable for your objectives, your income level and your age. Also, no disclosure is required for possible conflicts of interest that they may have.

Currently, only Independent Registered Investment Advisors are required to act in a fiduciary capacity.  Brokers, or also called “financial advisors” that work for a broker dealer or an insurance company are only held to a “Suitability Standard”.

Maybe comparing it to a real life scenario might help.  So, here’s an example of the two using a real life situation:

Let’s assume that you are buying a house and you need one that costs less than $250,000, 4 bedrooms and at least 3 baths, but you want one that has been fairly newly built within the last 5-10 years.  That criteria  alone would probably give your agent and you many options in housing to choose from that would be “suitable” to your basic needs.  However, what about the details you didn’t consider?  What neighborhood are these houses in?  Is the property value going up or down in the area?  Is this home in a good school district?  Is the neighborhood safe or have there been any crimes in the area recently?  Am I getting a good value on the home?  Has this home had any major repairs or issues with it?  How close are these homes relative to mine and my spouse’s work?

Wouldn’t you want to find a home that doesn’t just meet your basic needs (suitable) but one that exhibits all or most (fiduciary) of the criteria your family deems also as important?  So, would you rely solely on a real-estate agent to tell you what limited information that they know about the house they are showing you?  A real estate agent can be hired by acting as your agent to find a home as well as he/she can be hired by a seller to list their home.  Either way, there is no way that an agent can know everything about a home based upon what the seller chose to disclose or what the seller chose to disclose to the actual agent they listed it with.  Or would you rather hire and independent third party company to do a thorough, detailed analysis of everything prior to your purchase?  Of course!  You are going to want to know about everything you cannot see with your eyes.

Recently, my husband and I purchased a home that looked perfect by what we could visually see.  But prior to purchasing the home, we hired an independent third party inspector come and inspect the home.  I was there when they came.  I watched them check everything from running the A/C & Heat, to the dishwasher, stove, microwave, hot water temp, caulking on windows both inside and outside…  They even went as far as checking the closet shelving units by making sure they were screwed into studs properly.  We were so glad that we paid for the inspection because they found that there were many electrical outlets not working, the whirlpool tub wouldn’t turn on, most all windows were not caulked on the outside and that there was condensation already between the panes of one of the windows because of it.  They also found many door stoppers were broken and that our hot water wasn’t getting very hot at all.  Most all of those things would never have crossed my mind to check prior to our purchase…

So, why do we treat our finances differently?  Shouldn’t we be at least somewhat knowledgeable about the different types of advisors are out there and how they are compensated when it comes to our financial future?