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Fiduciary vs. Suitability

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Recognizing the difference between the fiduciary and suitability standards may help you to appreciate the level of care you receive from a trusted financial advisor.

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Deciphering the “what’s what” and “who’s who” in financial services

Fiduciary vs. Suitability

Do you receive financial advice in line with the fiduciary standard or the suitability standard? It’s important to know!

The words “fiduciary” and “suitability” are critical in understanding the type of the level of care you receive from a financial professional.

Here’s a breakdown of the types of financial professionals and the standard they are required by law to adhere to.

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CAPTIVE BROKER or INSURANCE AGENT

(Suitability Standard)

  • Offers a range of insurance or investment products carried by the company or companies he or she represents
  • Securities registration is required to offer investment products
  • Insurance license is required to offer insurance products
  • Is paid a commission calculated as a percentage of the amount of money paid into the product
  • Before selling a product, a broker only needs to determine if the recommended product is suitable for a prospective buyer, based primarily upon financial objectives, current income level and age, and a number of other specific items in order to recommend a product to a consumer.
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INVESTMENT ADVISER

(Fiduciary Standard)

  • Specific securities registration is required to offer financial advisory services.
  • Securities Registration is required to offer investment products (may also receive commissions on the sale of investment products)
  • Insurance license is required to also offer insurance products (may also receive commission on the sale of insurance products)
  • For Advisory services, is generally paid on a flat fee or a percentage of the assets under management or advisement
  • Requires advice to be in the best interest of the client and for the advisor to disclose any possible conflicts of interest

The Grace Capital Management Group adheres to the fiduciary standard, helping to ensure that every transaction is done in the best interest of each client.

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WHY SHOULD YOU CARE?

We believe that the differences discussed above were a contributor to the 2008 credit crisis, especially within the selling of complex financial products based on housing debt. More recently, the initial public offering (IPO) of Facebook stock was roiled by alleged conflicts of interest by those offering the stock.

Today’s financial industry offers its clients a wide range of options. In our eyes, every client deserves to have their needs put first and solutions offered according to those needs.

A Grace Capital Management Group advisor can help you to understand these options and work with you to decide how they might impact your specific financial needs.

Prior to meeting with a Grace Capital Management Group advisor, ask your current or prospective financial advisor if they are acting as an insurance agent, a securities broker or an investment advisor.

Ask them to formally list all the areas in which they and their company can receive commissions. If they cannot or will not, we strongly urge you to question why not.

1 The Hidden Costs of Mutual Funds published March 1st, 2010. Copyright Wall Street Journal.
2 Shining a Light on Murky 401(k) Fees published November 13, 2010. Copyright Wall Street Journal.

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