Many individuals who are interested in investing lack the time and expertise they desire to play an active role in their financial endeavors. Employing a financial advisor is typically the course of action such individuals take. When enlisting the aid and advice of an investment professional, determining how their practice will benefit you and under what standard they operate will help you decide whose advice to accept.
Fiduciary can apply to a number of different relationships including that of guardian and ward, trustee and beneficiary, and attorney and client. The fiduciary standard, however, solely applies to investors and financial advisers.
Enacted in 1940 as part of the Investment Advisers Act, the fiduciary standard serves to protect and benefit individuals who choose to use a financial advisor. This standard, for those who choose to abide by it, requires advisors to consider their clients’ needs and interests before their own. Additionally, the fiduciary standard requires advisors to inform their clients of any potential issues or conflicts that could arise from their investment preferences. With this standard of conduct, advisors must operate in a cost-effective manner, using their clients’ finances in a responsible and profitable way. Not all advisors adhere to this standard, however, and instead are able to abide by the suitability standard.
Though the fiduciary standard requires advisors to prioritize their clients’ needs, the suitability standard is beneficial in a less extreme way. Adhering to this standard means advisors must still act in ways that are deemed most suitable for their individual clients’ needs, however they may make some recommendations that will require higher contributions from the client while benefiting the advisor, often with a higher commission. An advisor operating under the fiduciary standard would not be permitted to make such recommendations as a higher cost is not in their client’s best interest.
Only independent registered investment advisors are required to commit to the fiduciary standard at this time. Fiduciary advisors are obligated to provide care and consideration for their clients beyond what a suitability advisor would offer. Both kinds of advisors are capable and qualified to provide investment advice for their clients. However, it is important that you consider your needs, preferences, and investment goals prior to selecting a financial advisor to assist you in your investing initiatives.
Destry Witt writes independently of his business, RELiANCE Investing, Inc., which is a Registered Investment Advisor only. This information is not intended to be personalized. This content is for informational purposes only. Nothing presented here should be construed by anyone as an invitation or solicitation to buy or sell any investment.