Is your current financial advisor acting in your best interest? What conflicts of interest exist? Does your advisor follow only the suitability rule to determine appropriate investments for your portfolio? Does he or she act in a fiduciary capacity? It is important for an individual to understand the regulatory standards and confines by which financial professionals work. In order to attain the best possible financial advice, guidance and client service, investors need to realize that there are great differences between how financial advisors and brokers qualify investments for their clients.
In order to determine which regulatory standard is the best fit for your situation, it is crucial that you understand each standard on its own. By definition, FINRA’s suitability rule states that firms/brokers must have reasonable basis to believe that any investment strategy or transaction involving securities that they recommend is suitable for that particular customer. This belief is based directly on the client’s information as per only their investment profile. An investment profile includes information such as the client’s age, other investments, investment time horizon, investment experience, net worth and liquidity needs. (For related reading, see: Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)
As long as the financial professional believes the investment to be suitable for the client given their investment profile, the broker can then go ahead and recommend that security or strategy accordingly. Although this may sound like a thorough vetting process, it is not as in depth as the fiduciary standard.
What is the fiduciary standard? This standard requires advisors to always act in their client’s best interests and put their client’s interests before their own. The fiduciary standard is similar to that of an attorney, CPA and medical professional. A prime example as to when this standard is important is when an advisor is purchasing securities. If acting as a fiduciary, the advisor cannot purchase securities for his or her account prior to purchasing them for a client. Additionally, the advisor must always disclose any potential conflicts that may exist. As you can see from the two, the fiduciary standard is significantly more client-centric and appropriate.
Although there are rules and standards in place that help to govern both the broker-dealer and the Registered Investment Advisory (RIA) world, it is evident that the RIA fiduciary standard is far more stringent. With an advisor always acting in the best interests of the investor, clients are significantly more insulated from fraudulent business practices as well as unsuitable investments that may result in avoidable loss. It is extremely important for every investor to discern whether their current advisor, or even one they are looking to hire, acts in a fiduciary capacity or if they are only obligated to make recommendations that are consistent with the underlying investment profile of the client.
As an Securities and Exchange Commission (SEC) registered Investment Advisory firm, Mitlin Financial acts in a fiduciary capacity. The fiduciary standard is a topic that should be discussed with your advisor, broker-dealer and/or every financial services professional. Knowing who will be managing your financial future ahead of time can help an investor circumvent potential downside risk. (For more from this author, see: Does Your Financial Advisor Have a Succession Plan?)
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.