Fiduciary vs. Suitability Standards-Your Need to Know the Difference
Beth Banker, a successful business woman, has been having ongoing neck and back issues. She decided to access web based information as to obtain self treatment options. Upon her reading, she realized that her condition, although appearing musculoskeletal in nature may be more involved with underlying pathologies. Although her intent was to heal herself, in reality she became more concerned and stressed as to the amount of research and data that existed…which she didn’t understand. Beth quickly learned that although having the desire to help herself, she realized her condition may warrant a consultation with a knowledgeable professional.
Dr. Hands Healer determined his office is progressively becoming more profitable and now has the ability to save each month. Dr. Healer decides to research the myriad of financial products and educates himself on opportunities of how to invest. His inquiries quickly turned into an avalanche of emails from research sites and offers of financial help. Like Beth, Dr. Healer quickly became disenfranchised and overwhelmed by the amount of information that existed and more importantly not understanding what it all meant. Although highly educated and motivated to save and invest, he soon realized he was beyond his expertise and levels of financial understanding.
The necessity of consulting with a professional knowledgeable of the intricacies and available information of financial assets should never be underestimated. Consumers have access to an infinite amount of research materials, pundit opinions, and advertisements touting cure alls or potential financial windfalls without any appearance of negative consequences.
Patients like Beth have good intentions when attempting to help themselves with simple, uncomplicated health matters. It is conceivable that instituting some lifestyle changes and progressive strengthening exercises may help to alleviate her symptoms, but is it getting to the core underlying cause of her condition? The downside exists that if self-care fails to help, has valuable time been lost? Ultimately, who does a patient select to consult for their condition? The professional selected should have the patient’s interest in the forefront of all decisions made and is a fiduciary taking their oath to uphold its meaning. “A fiduciary duty is the duty to look out for the interests of a third party, even if they conflict with your own interests. It is fundamental to the physician patient relationship.”¹ In other words, doctor do no harm!
Beth decides to visit Dr. Healer and after filling out the requisite office intake forms the doctor performs a consultation and examination. Subjective complaints and objective findings are noted. Additionally, diagnostic tests may be necessary to confirm or rule out a suspected diagnosis or entity. Recommendations are given to the patient and a course of treatment is initiated. A reexamination is done within a certain time frame and compared to the initial findings-both subjectively and objectively.
Reminding the patient, it takes time to get sick and time to get better; communication remains open and transparent with questions answered and expected outcomes explained. Additional recommendations are made as the doctor-patient relationship moves forward. The needs of the patient are met and the doctor fulfills the fiduciary responsibility.
Dr. Healer after becoming disillusioned, disenfranchised and disgusted with the inordinate amount of financial rhetoric decides to contact a Certified Financial Planner™ (CFP®).² Part of Dr. Healer’s research alerted him to be watchful for fiduciary vs. suitability standards, as they are quite different. “Eighty-five percent of investors who use an investment adviser have not heard of or don't understand the difference between a fiduciary standard [CFP®] and a suitability standard.”³
CFP®s are fiduciaries and held to a very high compliance standard. Contrasting CFP®s are brokers and the agents who work for them. Their responsibility to act on behalf of a client is limited to the suitability standard. “Although advisers and brokers often perform the same function, advisers are subject to a strict fiduciary standard to act in their clients’ best interest while brokers are subject to a less rigorous standard of suitability to ensure that their recommendations are suitable for customers.”4
Similar to a patient filling out the requisite office forms to gather information, mostCFP®s use this information to develop an Investment Policy Statement (IPS). The IPS becomes the roadmap with which the adviser and client use as the asset portfolio is established and monitored. Similar to the patient reexamination and update report, the client should receive a quarterly statement clearly illustrating the return of investment as compared to the benchmark of their asset class holdings and the overall portfolio return less any agreed to fees. In addition, monthly statements are sent to the client from a third party fiduciary (i.e., Charles Schwab or Fidelity) clearly delineating the clients financial assets. The adviser does not at any time hold the client’s assets, but instead acts in a fiduciary manner to carry out the instructions of the client as agreed to in the IPS. This is an example of full transparency and fiduciary responsibility. The adviser places the need of the client before themselves vs. selling a product which at face value appears to be suitable for the client. “An adviser owes a fiduciary duty to act in an investor’s best interest, which includes a duty to avoid, or at least to disclose, material conflicts of interest.” 5
Piecemeal financial planning as might be performed by a broker or agent may appear prudent at the time of client purchase, but yet may well fall short of the client’s financial expectations and needs. “When recommending securities, a broker-dealer owes a duty of suitability, which is a duty to ensure that an investment recommendation or strategy is suitable for a particular individual at a particular time.” 6
The financial goals discussed and stipulated in the IPS, ongoing dialogue with the adviser, allows the full picture of what the client needs to reach their goals vs. the piecemeal haphazard approach to financial investing. After the initial consultation (examination), implementation and follow through is maintained and monitored when working closely with aCFP®s. “An investment adviser [i.e., CFP®s], by contrast, engages primarily in advisory activities, including portfolio selection, asset allocation, portfolio management, selecting and monitoring other advisers, and financial planning.”7
Successful planning involves the ability to first crawl, then walk, run and stay in the marathon to reach the expected goals. It takes client fortitude and discipline to stay the course in both up and down markets. It makes good sense to work with aCFP® who has the depth of knowledge necessary to understand the overall scheme of financial products and how market changes can potentially change financial returns or require a direction shift to minimize risk and maximize asset returns.
Beth selecting Dr. Healer ensured her healthcare needs were put first. Accordingly, Dr. Healer should be afforded the same opportunity by working with a fiduciary adviser to ensure his portfolio is carefully monitored with his needs placed first. There are no guarantees in life, health or finances, but minimizing the risks by working with a fiduciary-both in health or financial-allows a patient or investor to remain confident their interests will be served first and protected.
¹ Richards, III, JD, MPH,Edward P. “Fiduciary Duty” The Law, Science & Public Health Law Site<http://biotech.law.lsu.edu/cases/fid-duty/.>
² Certified Financial Planner Board of Standards, Inc. <http://www.cfp.net/.>
³Observer Stats & Facts. “Investors Confused About Fiduciary/Suitability Difference…” Journal of FinancialPlanning 24.8 (2011):12.
4Laby, Arthur B. “Selling Advice and Creating Expectations: Why Brokers Should Be Fiduciaries” Washington Law Review 87.3 (2012):707.