A War of Words - Fiduciary vs Suitability

A War of Words - Fiduciary Duty vs Suitability Standard

Here at Balanced Rock, we are constantly fighting a war of words. Fee-Only or Fee-Based? What's the difference? Fiduciary duty or Suitability standard? Why does it matter? What's problematic about being sold financial products? Isn't that what all advisors do? There's a storm of confusion in the financial advising world and navigating through it's mixed messaging to find genuinely unbiased and truly comprehensive advice is extremely difficult and unfortunately very rare.

The great financial debate for investors is not about stocks vs bonds. Rather, it is about a fiduciary vs suitability standard of care when it comes to investment advice.You may have noticed that we are proud of the fact that we are Fee-Only. We are. By removing the conflicts of interest and interference created by 3rd party compensation we are able to serve our clients interests purely by aligning our interests entirely with theirs. We are only paid by our clients and we only serve our clients, it's that simple.Fee-Based sounds a lot like Fee-Only and we come across many people who think they are the same thing. But the truth is they are very different. Fee-Based advisors are paid by fees from clients and by fees from 3rd parties. The financial industry has developed into an incentive driven distribution model to "push products" created by institutions, delivered to the market through salesmen or brokers (dubbed financial advisors, planners, and wealth managers) to the consumers. Fee-Based advisors are these salesmen and align themselves with broker/dealers. Typically they begin by charging an upfront fee to put together a financial plan and then build around financial products that they then sell the to client which in turn earns the fee-based advisor additional revenue from commissions, sales charges, and other compensation derived from the products they sell. We call this "double dipping" or the "fees+commissions" model!Not only are we Fee-Only but we are also Fiduciary-Only. We only operate under a fiduciary duty and are always legally bound to put our clients best interests first. There are many advisors who claim a fiduciary standard but don’t always act as one. These are most often the Fee-based brokers/advisors discussed above. By splitting their time between the fiduciary and suitability standard, even when dealing with one client, they act as part-time fiduciaries. Why would anyone want to work with someone who is only working in their best interest part of the time? Unfortunately most clients don't understand this reality, and the brokers certainly don’t go out of their way to clarify. Advisors that are dually registered shift back and forth between standards and where they are at a given moment is primarily unbeknownst to their clients. How do you know if you or your loved one's advisor operates in this duel manner? Here's an easy way to figure it out: if you see, “We are registered to sell Securities” or, “We are registered to sell Insurance” in the firm's disclaimers, it means they sell products and almost certainly operate under a suitability standard at times, not always putting the client's interests first.Licensed financial advisors who work (and sell securities and insurance) for broker-dealers (i.e., Morgan Stanley, Goldman Sachs, Merrill Lynch, UBS, Wells Fargo Advisors, Edward Jones, LPL Financial, Ameriprise, Raymond James, etc.) are regulated under the Securities Act of 1934. As such, they are held to the suitability standard and can recommend the investment or product that pays them the largest commission or fee as long as it is suitable given the individuals circumstances. Suitability only considers an individual's income and net worth, investment objectives, risk tolerance, and other security holdings; not their best interest. In contrast, Registered Investment Advisers (those that are NOT dually registered!) are regulated under the Investment Advisers Act of 1940 and held strictly to a fiduciary standard and are thus legally obligated to put clients' financial interests ahead of their own financial interests. While the major broker-dealers are all Dually-Registered as Registered Investment Advisors and broker-dealers, that just means that they charge fees for advice and also engage in product sales under the suitability standard.

For a real life story and in-depth look at this on-going war of words and how the confusion wreaks havoc on innocent people, check out this recent article from The New York Times titled, "Before the Advice, Check Out the Adviser." published on 10/10/14.