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10/06/2017

Suitability Versus Fiduciary: Know The Difference

If you are hoping to hire a fee-only financial advisor or you are already engaging the services of one, then you must have known that they act in separate and different capacities. These are Suitability capacity and Fiduciary capacity. These two capacities  may sound like they have the same meaning but in reality, they have different interpretations.

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It is very necessary to differentiate between the advisors who act in the capacity of suitability and advisors who act in the fiduciary capacity to be sure that the person who is going to manage your money is someone you can trust.
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As part of the Investment Advisors Act, the Fiduciary standard created in the year 1940 is regulated by the Security Exchange Commission and upholds the standard of the financial advisor placing the interest of his client before his own.
Below are the differences between a financial advisor acting in the capacity of suitability and that of fiduciary capacity:

FIDUCIARY CAPACITY FINANCIAL ADVISOR

  •  A fiduciary capacity financial advisor must at all times put the interest of his client first.
  • A fiduciary capacity financial advisor is banned from purchasing securities for himself or herself before making the purchase for his client.
  • A fiduciary capacity financial advisor must ensure that the information used to form the investment advice given to his or her client is authentic and thorough.
  • A fiduciary capacity financial advisor must ensure that he or she divulges any conflict of interests or any possible conflict of interest in the future.

SUITABILITY CAPACITY FINANCIAL ADVISOR 

  • As opposed to his counterpart, he doesn't need to place the interest of his client before his, logically has to believe that advice given in terms of client's financial needs, purposes and uncommon circumstances.
  • He must make sure that the transaction costs do not border on being overtly exaggerated and that the advice given to a client is not inappropriate.
  •  He must not be involved in extravagant trading, swirling to bring about more commission or constantly changing accounts to cause more transaction income for himself.
  •  As opposed to his counterpart, he may choose to either divulge or not to divulge any conflict of interests or future conflict of interest.
  • The investment does not necessarily need to be in constant synchronization with the investor's objectives and profile.
  • Fee-based investment advisors are encouraged to sell their products before products of lower cost that are competing with them. Their commissions are made this way.

CONCLUSION

If your interest lies in finding a fiduciary capacity investment advisor, then you should start by looking for a financial planner who is a fee-only advisor. This is because they have a fixed price that you will be charged, they are not product-selling driven, they do not make commissions and they do not sell investment products. You can hold their advice in high standard and your interest will be placed before theirs.

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