When searching for a financial advisor, you may have come across the term “fiduciary.” But what does it mean? And is it something you should check for before agreeing to work with a particular company or individual?
Choosing a financial advisor can be tricky. You want someone who will work hard for you, sourcing the right products and offering advice that you can rely on.
A fiduciary could be that person. They’re legally bound to put your interests first, regardless of how much they’ll make in return.
But that isn’t the complete picture. Not all financial businesses are fiduciaries, and that doesn’t mean you shouldn’t trust their advice.
In this post, we’re taking a detailed look at fiduciaries, including what they are, how they work, and why they could be the best option for your retirement plan.
You can watch the video on this topic above, or to listen to the podcast episode, hit play below. Or you can read on for more…
What is a fiduciary?
A fiduciary is a person or company that has a legal and ethical relationship of trust with another person. It’s a legal standard that holds financial advisors to account in their interactions with clients and customers.
The most important thing to remember about fiduciaries is that they must always act in their client’s interests. That means finding the best options based on the client’s requirements, regardless of the rate of commission they’ll receive for selling a certain product.
Fiduciaries are held to these standards through licensing and certification, including CFP (Certified Financial Planner) designation. So, when you see a financial advisor with these letters, you know they’re held to fiduciary standards and would lose their accreditation if they breached them.
By now you may be thinking, why aren’t all financial advisors fiduciaries? Shouldn’t they all act in the best interests of their clients?
Well, unfortunately, it’s not that simple. Fiduciary standards don’t work for every type of financial business, for reasons we’ll set out below.
What is suitability?
Suitability is the alternative to fiduciary. Think of it as a diluted version, wherein financial businesses aren’t held to the same strict standards.
Where fiduciaries always act in the best interests of their clients, suitability places more control in the hands of financial businesses. They don’t need to give the best advice and can recommend products based on commission, even if they’re not the best for the client.
That’s not to say financial advisors working within the suitability criteria are unethical. They still take into account a client’s requirements, and the products they recommend must align with their client’s financial goals.
But what kind of businesses and individuals would choose to work within the suitability criteria? And why do they choose not to adhere to fiduciary standards?
Typically, commission-based financial businesses are most likely to work to suitability standards. That’s because they need to make a certain rate of return, and so recommend products that are of more benefit to them than their clients.
This might sound questionable, but suitability is necessary to keep some businesses afloat. It’s also worth remembering that those working within the suitability criteria must consider their customer’s requirements; they can’t recommend poor products and bad deals.
For this reason, many suitability advisors take the stance of: “I’m not bound by the fiduciary law, but I treat my clients like I am.” This is a common practice but something you should take with a pinch of salt. After all, there’s a high likelihood that they’re benefiting from a sale as much as you are.
How do fiduciary and suitability compare?
To help you understand how fiduciary and suitability differ, here’s a helpful analogy showing how each model works in practice.
Let’s say you want to buy a new car for your family. The first dealership you visit recommends large saloons, station wagons, and SUVs, all at different price points. There’s no pressure to buy from the dealer, and you make a choice based on the information they’ve given.
Then, you visit another car lot. Here, the dealer recommends a car that, though suitable for a family, is slightly over your budget. However, they convince you that it’s the right car and you buy it even if it’s not the deal you were looking for.
Can you guess which was the fiduciary dealer and which was the suitability dealer?
That’s right, dealer one was a fiduciary. They offered lots of options that were suitable for families and didn’t recommend any cars that were over your budget to make more commission.
Dealer two was the suitability model. They had one or two suitable cars and used salesmanship to convince you to spend more, making more commission for themselves in the process.
Again, this might sound questionable, but it comes down to how a business is set up and the type of industry they work in.
A final word on fiduciaries and suitability
After reading this guide, you might be thinking that suitability advisors are all bad and fiduciaries are the only way to go – but don’t. Sure, you should be cautious about taking suitability advice at face value, but it doesn’t mean you’ll get a bad deal that doesn’t work for you.
At Peace of Mind Wealth Management, we choose to stay within the fiduciary arena because we believe it’s the best fit for our practice and our clients. Both Radon and Murs are accredited CFPs and are licensed investment advisors, meaning they’re legally bound by fiduciary standards.
If you’re looking for wealth management advice with the assurance of fiduciary accreditation, we can help. Putting your needs at the heart of everything we do, our financial services can help you on your retirement journey.
We hope this guide on fiduciaries helps you think differently about your financial decision-making. Remember, if you need any advice or expertise, our financial specialists are here to help. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.