A financial advisor can be held to one of two standards: fiduciary or suitability.
A financial advisor held to the fiduciary standard is required to put your interests ahead of their own interests.
Not all financial advisors serve clients under this standard.
A financial advisor held to the suitability standard is not required to put your interests ahead of their own interests. To meet suitability requirements, a financial advisor must “check the boxes” for areas making up an investor’s profile, such as:
- the customer’s age
- other investments
- financial situation and needs
- tax status
- investment objectives
- investment experience
- investment time horizon
- liquidity needs
- risk tolerance
Example of fiduciary vs. suitability
A financial advisor must recommend one of two investment options to a client. The two investment options are almost identical and considered suitable investments for the client’s needs. One has a reasonably low-cost while the other charges a higher fee and pays a commission to the financial advisor.
The fiduciary financial advisor would choose the less expensive option. The traditional financial advisor following the suitability standard has more incentive to choose the higher-fee, commission-based investment.