Did you know that not every advisor is required to put your interests ahead of their own?
The “fiduciary standard” is a standard of care that legally requires an advisor and his/her firm to put the client’s interests ahead of their own. This is a strict standard to adhere to. Advisors for Trust companies and Registered Investment Advisor (RIA) firms are fiduciaries.
The “suitability standard” is a standard of care that only requires the financial representative to believe that a recommendation is suitable for the client. It does NOT require that the interests of the client be put ahead of the interests of the representative or of their employer. This can present tremendous conflicts of interests. Broker-dealer, insurance, and annuity firms typically fall under this standard.
A person’s title provides no information in regards to the standard of care that he or she will provide. There are few if any limitations on the use of the terms “Wealth Advisor” and “Financial Advisor”.
Typically, firms that are under the “suitability standard” derive a large percentage of their revenue from sales of products that pay them a commission. A quick Google search defines “conflict of interest” as:
“a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity”
An example of a conflict of interest would be when a financial representative is deciding which of two similar investment products to present to a client when one pays a larger commission than the other.
Typically, firms that fall under the “fiduciary standard” (Trust companies and RIAs) derive most or all of their revenue from Assets Under Management (AUM) fees. The fee is simply a set percentage of the total market value. Revenues increase (in dollars) as the investment portfolios grow and decrease as they decline. Referencing the conflict of interest example above, a fiduciary financial advisor would be required to recommend the investment that he or she believes is best for the client, and would not recommend one that pays them a commission.
There are plenty of financial firms to choose from when looking for financial advice. For individuals and families with moderate or greater levels of wealth, that advice should come from a financial professional who puts your interests ahead of their own.