April 2, 2015 | By fischer |
In the medical profession, physicians practice according to a familiar standard: “First do no harm.” There should be a similar level of commitment for anyone who wants to advise you about your financial well-being, right? Unfortunately, wrong. Financial advice is subject to a double legal standard: “fiduciary” versus “suitable” advice. Worse, it’s up to you to spot the differences between them, and to heed the quality of the advice accordingly.
Fiduciary vs. Suitable: Different Incentives Drive Different Advice
Let’s begin with an analogy. This classic HighTower animated video compares fiduciary versus suitable advice to similar differences between a registered dietitian versus “Lou the Butcher.”
Lou can offer suitable information about quality cuts and prices as you purchase his wares, but you wouldn’t ask a meat vendor whether he’d recommend steak or eggplant. Because of his business interests, you already know what his answer will be. A dietitian, in contrast, is paid to advise you on your overall diet according to your personal health goals. His or her livelihood depends on improving your well-being, rather than promoting one product over another.
Similar differences exist between a suitable broker versus a fiduciary advisor. Both may recommend investments, but a broker’s suitable advice is expected to be influenced by underlying interests in promoting one product over another. Fiduciary advice, in contrast, must be based exclusively on advancing your highest financial interests. This is what Fischer Investment Strategies believes and practices every day!
Fiduciary vs. Suitable: What’s the Difference?
Why the different legal standards? Government regulators assume that a broker’s primary role is to place trades, so any advice he or she offers is considered secondary to this main, transactional business. A broker’s advice must be suitable for you, but it does not have to be best for you.