Whose interests come first? The difference between suitability and fiduciary

Imagine for a minute that you could go to a car salesman who unquestionably put your interests first. Ahead of any car brand, any dealership, or even his own monthly sales goals. He’d ask you about how you drive, how your car payment is impacting you financially, and why you’re considering buying a new car in the first place.

After assessing your needs, he might recommend getting an available model that his dealership perhaps doesn’t even sell. Or maybe he’d take you into the little sales office and explain why buying a new car at this time might be a big financial mistake for you.

“Strange” wouldn’t be a strong enough word to describe this scenario. In fact, if you experienced this type of treatment, you might wonder if you were in some kind of dream.

When you visit a reputable car dealer, you expect the salesperson to be honest about the attributes of the cars, including their actual cost to drive off the lot, but you always know that their goal is to sell you something that they directly represent and is available today. This is an example of “suitability.” The salesperson is honest and doesn’t pressure you into buying something you don’t need. But their loyalty is ultimately to their dealership.

But the law recognizes a higher standard of representation for your financial interests. It’s like our first example where the car salesman puts your individual financial outcomes above all else. It’s called the fiduciary standard.1

When your lawyer is acting as your fiduciary, they treat your property or money as if it were their own. Of course, they need to be paid for the valuable services provided. Most often, that payment is through an hourly fee or retainer.

For something as important as saving for retirement, you want the help of an advisor who is a fiduciary.

Stacy Francis, CEO of Francis Financial, writes for CNBC that with so many different kinds of people offering financial advice—planners, analysts, agents, brokers—people are often confused about what standard of loyalty to expect.2

“An investing study by Personal Capital,” Francis writes, “revealed that nearly half of Americans mistakenly believe that all financial advisors are fiduciaries required to act in their client’s best interest at all times. But that’s just not true.”

She explains that only when a financial advisor is legally bound to act in your best interest are they a fiduciary.

“Others who call themselves advisors are only held to a suitability standard, meaning they only must suggest products that are suitable for you—even if they’re more expensive and earn them a higher commission.”

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