19 Dec Fiduciary vs. Suitability
In the financial world there are different types of financial advisors you can entrust your money to. These advisors of your funds adhere to different laws and standards based on how they can help you specifically. This article is meant to inform you on the main difference between RIAs (Registered Investment Advisors) and the other various financial advisors you may encounter. Not only the different standards they are held to, but what exactly each can offer you. Ryan Furman & Sean Ross of Investopedia give us a great overview of what sets your Financial Advisor apart.
The first difference is the laws and standards these professionals must be responsible to uphold. The difference between the Suitability Standard and the Fiduciary Standard is very distinct but hard to see from the definitions alone. An easy way to think of it is this; the fiduciary standard states that the fiduciary (financial advisor/RIA in this case) must place their client’s needs before their own, whereas the suitability standard only requires the Broker to believe that the investment is suitable for the clients’ needs. It does also state that the Broker is not to charge excess fees from the transaction and that their transaction is in the benefit of the client. The fiduciary standard is regulated by the S.E.C. (Securites & Exchange Commission). This means that the rules are strict and enforced equally. Because of this, Financial Advisors need to make sure that their advice is as accurate as possible. Also, the standard prohibits fiduciaries from making trades that may result in higher commissions for them or their firm. They are also entrusted to disclose any potential conflicts of interest with any advice they give, and they must trade with the “best execution” standard: They must strive to make trades at the best combination of low cost and efficient execution.
While licensed fiduciaries are more like stewards of your money and your wishes, the S.E.C. considers brokers as more middlemen in the investment world than anything. They create the link between the capital and the investment products, ranging from common stocks, mutual funds, to annuities, futures, and options. Financial advisors also have this in their powers and much more. In fact, Financial Advisors can give advice on every area of their client’s financial life, retirement planning, college payments, debt allocations, all of it. Not only this, but Financial Advisors are not limited to a single market. An insurance broker may be limited to annuities, and a stockbroker limited to his field, but a Financial Advisor can utilize just about any investment/financial vehicle under the sun to help his client achieve his/her goals. This can give a great advantage in the market when it comes to diversification. Putting your money into investment vehicles that are not tied to the usual sectors of the market, allows you to avoid many of the complications, and fluctuations, that come with traditional investments.
Overall, a Financial Advisor is the coach in your corner with all the answers to your questions, and the tools at his disposal to solve your problems. This doesn’t mean that brokers are bad, in fact, some brokers are absolute specialists in their fields. But when it comes to something as complicated as life, why put something as important as your money all into one basket. Make sure that you are having all your questions answered and that your money is working just as hard for you, as you worked for it. Remember, Plan Smarter Live Better.
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