If you're an investors looking for financial advice who does not know the difference between fiduciary duty and suitability, you're not alone. In fact, some whose minds take a more cynical view of the financial industry might say that that is exactly how the industry wants it. Confusion or ignorance over the professional standard of the care in the industry unfortunately leads to many investors losing many millions of dollars every year to financial advisors who are upholding one standard while investors think they are upholding another. Let us explain.
Fiduciary Duty Is the Highest Standard of Care
In the financial industry, fiduciary duty or obligation or responsibility requires that the professional managing your money always act in the best interest of his or her client, and provide them with the highest standards of care and diligence. The suitability standard, on the other hand, only requires that a financial professional faithfully match an investor's profile and objectives with his or her investments.
Ok, but aren't those pretty much the same thing? you ask.
Reforms Attempt to Make Fiduciary Duty Uniform for Securities Industry
You might think so, until like us you've been in litigation with hundreds of clients against hundreds of brokers and broker-dealers. In fact, they are very much not the same thing, and current reform to financial rules and regulations under review by the regulatory bodies governing the financial industry, the SEC and FINRA, have homed in on this discrepancy. For many years now, investor advocacy groups have lobbied for a unified theory of the duty owed by financial advisors and investors advisors alike to their clients - the higher, fiduciary duty standard. Meanwhile, the industry has fought like heck to keep things the way they are, citing increased costs of supervision and potential litigation as prohibitive of raising the standard across the board.
Whatever your view of the merits of the debate over professional standards of duty and care, however, that does not change the fact the retail investors are more or less completely unaware of any distinction at all between the two standards, and that, at least in our experience, 9 times out of 10, if you ask an investor which standard they think their advisor upholds, it is fiduciary duty.
Which makes sense, right? Because of course - it's your money!
What You Can Do to Protect Yourself and Your Money
The best way to protect yourself against a nasty surprise when it comes to your financial advisor's standard of care is to find out which one he or she upholds. Typically, financial advisors are only obligated to honor the suitability standard, while registered investment advisors adhere to the fiduciary standard. However it is always a good idea to ask and confirm. Always.