Choosing an Advisor: Fiduciary vs Suitability StandardIf you are searching for a professional to assist you with financial planning and investment decisions, you will undoubtedly encounter a number of folks who advertise their services under various job titles. Unless you look carefully, you might get the idea that financial advisors, financial planners, financial consultants, insurance agents, and stockbrokers all do pretty much the same functions and have the same legal requirements. In fact, that assumption is inaccurate, and it is important for you to understand several key differences before you make your decision.
Despite the variety of job titles, financial services are essentially delivered by two categories of professionals: Registered Investment Advisors and broker-dealers. These two categories of professionals are held to different standards of care as pertains to your interests: Fiduciary Standard versus Suitability Standard.
Registered Investment Advisors and Fiduciary Standard
Registered Investment Advisors are regulated by the Securities and Exchange Commission (SEC) or state securities regulators. The SEC stipulates that Registered Investment Advisors can provide a broad range of financial/investment advisory services such as financial planning for college education and retirement, estate and investment planning, and asset management. Typically, Registered Investment Advisors do not “sell” proprietary investment products, and their compensation comes from fees they charge. These fees can be billed on an hourly basis, as a percentage of assets under management, or as a flat fee retainer. While some advisors may charge commissions on trades; typically, commissions are charged only if an advisor has a separate broker-dealer arrangement in addition to her or his Registered Investment Advisor business. To avoid a conflict of interest, the advisor would be required to disclose any broker-dealer arrangement to his or her clients. Currently, only Registered Investment Advisors have a legal responsibility to act as a fiduciary.
Registered Investment Advisors are bound to a fiduciary standard that was established in the Investment Advisor Act of 1940. The Investment Advisor Act defines a fiduciary standard in which investment advisors must always act in the best interest of their client and must always put their client’s interest ahead of their own interests. Therefore, advisors cannot recommend higher expense investments simply because the advisor will receive more compensation from that investment. It also means that advisors must make sure that their advice is accurate, complete, and as thorough as possible. The Registered Investment Advisor’s ultimate responsibility is to provide clients with objective advice. As a Registered Investment Advisor, True North Capital Alliance conforms to its responsibility to serve as a fiduciary.