Suitability Standard versus Best Interest – What They Mean For You

Our firm follows a fiduciary standard of putting our clients’ interests first. We believe this is simply the right thing to do and ultimately is good business. In the financial services industry there are two regulatory standards – a fiduciary standard and a suitability standard. The majority of the public does not understand the two different rules under which various types of financial advisers operate. Failing to be aware of this difference can have negative financial impacts.

Most broker dealers, insurance salespersons and other financial company representative operate under the “Suitability Standard” which is:
o Know your client and their financial situation.
o Recommend products that are suitable for their situation.

Registered Investment Advisors (RIA) or an ERISA appointed Fiduciary must operate under the “Fiduciary Standard,” which is:
o Put the client’s best interest first.
o Act with prudence; that is, with the skill, diligence and good judgment of a professional.
o Do not mislead clients; provide full and fair disclosure of all important facts.
o Avoid conflicts of interest.
o Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

Fred Reish, a very well-known ERISA attorney, summed up the differences this way: “With regard to the standard of care under current securities laws, a broker-dealer needs only to determine that an investment is suitable for the client. However, the fiduciary standard of care requires that the adviser take into account a number of considerations, such as whether the fees are reasonable, whether the investments are adequately diversified, whether there are conflicts of interest, whether the investments are consistent with the provisions of the trust or other governing document, and so on.”

On Wednesday April 6, 2016 the Department of Labor (DOL) released new rules pertaining to IRA’s which in many cases requires advisors and firms to be fiduciaries. We believe this is a good thing. The bill also attempts to increase the transparency of expenses which we also believe is a good thing.
At the end of the day the key is for your portfolio to meet your needs, objectives and risk tolerance while you are aware of all fee’s and expense associated with the relationship. The least expensive option may not be the best; however, you need to know what you are paying to determine if the relationship makes sense. Many investments with high commissions or expenses such as some annuities or limited partnerships do not make the information readily available. Our team is always here to help you evaluate any investment opportunity and to answer any questions that you may have.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Randy Carver and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Fred Reish.