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Fiduciary vs. Suitability

Deciphering the “what’s what” and “who’s who” of today’s complex financial services industry can be difficult, even for the most financially sophisticated members of the general investing public. 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. Though the distinction between the fiduciary and suitability methods of offering advice is rarely discussed by “broker-led” large financial companies, we feel it is essential for investors to know the difference.

Accrue Wealth Designs believes the fiduciary model is and always has meant acting in the “best interest of the client.”

BROKER (THE SUITABILITY STANDARD):

  • Offers products for sale from a range of products carried by the company he or she represents
  • Is paid commissions calculated as a percentage of the amount of money invested into the product

ADVISOR (THE FIDUCIARY STANDARD):

  • Offers "advice in the best interest of the client" taking into account the needs of each individual client
  • Is generally paid a quarterly fee calculated as a percentage of the assets under advisement

“What’s What” relates to the standard of care upon which financial advice is provided to the investing public:

The fiduciary standard requires advice to be provided in the best interests of the client, including the disclosure of possible conflicts of interest.

The suitability standard requires only that a broker have reasonable grounds upon which to make suitable recommendations to prospective buyers, based primarily upon financial needs, objectives and unique circumstances. The broker's duty is to the broker-dealer by whom he or she is employed, not necessarily the client. Conflicts of interest oftentimes exist, but no disclosure of possible conflicts of interest is required by the broker to the client. One such conflict is inducements that may be paid to brokers by mutual fund companies for the sale of their products.

WHY SHOULD YOU CARE?

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.

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.

The two different standards — fiduciary and suitability — may affect your relationship with the people and corporations you rely on for financial advice. Are you and your financial advisor both on the same page?

Since 2008, the U.S. government has also begun to care about how financial recommendations are delivered to members of the general investing public. The lack of “self-policing,” protection of client interests and frequent scandals have led our legislative system to pass The Dodd-Frank Wall Street Reform and Consumer Protection Act.

Informed investors should ask: “Why does the government feel I need protecting and from what?”

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.

An Accrue Wealth Designs 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 an Accrue Wealth Designs advisor, ask your current or prospective financial advisor if they are acting as a broker or an advisor.

STRATEGIES FOR YOUR FINANCIAL FUTURE

Contact us at office@accruewealthdesigns.com or call us at 480-565-4363 today to schedule a time to discuss your financial situation and the potential role of insurance or investments in your financial strategy.

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