Fiduciary vs. Suitability

Presented By: Antonio Gomes, MBA

Investment advisors are bound to a fiduciary standard that was established as part of the Investment Advisors Act of 1940. They can be regulated by the SEC or state securities regulators, both of which hold advisors to a fiduciary standard that requires them to put their client's interests above their own. The act is pretty specific in defining what a fiduciary means, and it stipulates that an advisor must place his or her interests below that of the client. It consists of a duty of loyalty and care, and simply means that the advisor must act in the best interest of his or her client. For example, the advisor cannot buy securities for his or her account prior to buying them for a client, and is prohibited from making trades that may result in higher commissions for the advisor or his or her investment firm.

Deciphering the difference between the two in today’s complex financial services industry is very important!

The suitability standard states that a broker only needs to check the suitability of a prospective buyer, based primarily upon financial objectives, current income level and age, in order to complete a commissionable sale of a financial product. In a way, when a broker checks the suitability of a potential buyer, they are measuring how much financial product can be sold, not the needs of the investor. No disclosure of possible conflicts of interest is required. Common differences between the two standards involve trading commissions; for example commissions and incentives paid by annuities and mutual fund companies back to the broker dealer. These inter-company inducements can create conflicts between the investor’s requirements and the motives of the broker. When a company suggests the purchase of a proprietary product, such as a mutual fund or an inventoried security, such as a bond, in the knowledge they will receive a direct and upfront commission, can that suggestion be relied upon to be fair for the advantage of the client?

Do you receive Financial Advice to the Fiduciary Standard of Care or the Suitability standard? It’s important to know!

Deciphering the difference in today’s complex financial services industry can be difficult, even for the most financially sophisticated investors. Two words: fiduciary and suitability, are critical in understanding the motivation behind the person offering you financial products or advice.

Recognizing the difference between the fiduciary and suitability standards may also help you to appreciate the level of care you receive from a trusted financial advisor. Although the distinction between the fiduciary and suitability methods of offering advice is rarely discussed by large financial companies, we feel it is essential for investors to know the difference.

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According to the Securities and Exchange Commission (SEC), investment advisors provide many services, including assisting individuals and institutions in making financial decisions pertaining to planning for retirement, saving up for a child's college education or planning and developing investment strategies to manage assets and portfolios. They can charge fees for their services, which can be on an hourly basis or a percentage of the assets they manage for clients. Instead, some advisors charge commissions on trades they make for their customers. They may manage individual portfolios, divided up by separate clients, or pooled investments such as hedge funds, pension funds and other related commingled assets.

We believe the Fiduciary model of disclosure and transparency is in the “best interests of the client.”

Every day, financial products are sold for a commission and include internal costs and fees which are difficult to find and define. The dollar value of these commissions and additional internal costs are usually deducted from the amount an investor invests in a financial product. The total return of such a product may therefore be reduced by the value of these hidden costs. 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.

We can help you to understand how your current relationship is structured and work with you to determine the best strategy given your specific financial needs.

The Suitability Standard

Choosing a Financial Advisor: Suitability vs. Fiduciary Standards

Fiduciary - Investment Advisors

In the investment field, there are two primary parties who are able to offer investment advice to individuals, as well as institutional clients such as pension funds, non-profit organizations and corporations. These parties are investment advisors and investment brokers who work for brokers-dealers. Many clients may consider the investment advice they receive from each party as similar, but there is a key difference that may not be completely understood by the investing public. The difference pertains to two competing standards that advisors and brokers must adhere to, and the distinction has important implications for individuals who hire outside financial assistance. Below is an overview of both parties, the standards each must follow and how the standards that brokers follow can create conflicts between themselves and their underlying customer base.

The Fiduciary Standard

Suitability - Broker-Dealers


Broker-dealers serve many of the same functions as investment advisors in that they help individuals and institutions make important financial decisions. The SEC does make certain distinctions though, such as considering them financial intermediaries who help connect investors to individual investments. It details that a key role is to enhance market liquidity and efficiency, by linking capital with investment products that range from common stocks, mutual funds and other more complex vehicles, such as variable annuities, futures and options.

The SEC defines a broker as someone who acts as an agent for someone else, and a dealer as someone who acts as a principal for their own account. An example of an activity a dealer may carry out is selling a bond out of his or her firm's inventory of fixed income securities. The primary income for a broker-dealer are commissions earned from making transactions for the underlying customer.  

Note that the above definition does not demand that your broker do what is best for you – only that it be “suitable.” It also does not preclude conflicts of interest. Unfortunately, what is best for you may not be best for the financial advisor: there might be two investments that would qualify as suitable for you, but one would pay your advisor a 1% commission or fee, and the other a 7% commission. Which do you think he might recommend?

Investors should understand that working with an advisor who is a fiduciary does not guarantee they will experience greater investment performance or reduced losses as compared to working with an advisor who is not acting as a fiduciary.

Antonio Gomes, MBA

Tony Gomes utilizes a diversified mix of portfolio management services, estate planning and retirement planning to offer personalized services to each of his clients. Seeking lasting, quality relationships with his clients, Mr. Gomes is a strong believer in Active Investment Management, encouraging clients to adopt common sense financial planning principles and to avoid trendy investment fads or speculative strategies. With that said, all markets offer opportunity and Mr. Gomes will help guide you towards potential opportunities.

Mr. Gomes offers his services to clients in (but not limited to): Sarasota, Bradenton, Nokomis, Ft. Myers, Tampa, St. Pete, and Osprey Florida.

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