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Fiduciary vs. Suitability: Advisor Differences | Pacific Premier Trust

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  |  By Christopher Orr, CISP®, SDIP

Self-directed IRA investors often rely on financial advisors to help manage their retirement funds and evaluate investments. But not all retirement investors realize that two different standards of care—the fiduciary standard and the suitability standard—are applied to advisors who offer investment advice. Understanding the difference is crucial when finding an advisor who fits your needs.

The two standards differ significantly and will have an impact on the type of investment advice you receive. To ensure you remain on track toward meeting your financial goals and managing your self-directed IRA, here is a look at the differences between the fiduciary vs. suitability standard of care.

The Fiduciary Standard

This standard has been in existence since 1940 when it was created as part of the Investment Advisors Act. In short, it requires that a financial advisor always act in the best interest of the client and put the client’s interest first. This is the standard followed by investment advisors who are registered with the U.S. Securities and Exchange Commission or state securities regulators.

Financial advisors who are considered fiduciaries are required by the SEC to:

  • Provide undivided loyalty and utmost good faith
  • Avoid misleading clients
  • Provide full and fair disclosure of all material facts when offering investment advice. These are facts that "a reasonable investor would consider to be important."
  • Avoid all conflicts of interest or disclose any potential conflicts of interest that may exist

Advisors who follow the fiduciary standard are forbidden from using a client's assets for their own benefit or the benefit of other clients. 

The Suitability Standard

The suitability standard differs greatly from the fiduciary standard. Generally, investment brokers who are regulated by the Financial Industry Regulatory Authority (FINRA) are held solely to the suitability standard.

This standard requires that advisors:

  • Recommend investments they believe are “suitable” based on a client’s profile, which takes into account factors ranging from their age to financial situation to risk tolerance
  • Ensure clients won’t incur excessive investment costs and that excessive trades won’t be made in their account

Under this standard, “suitable” investments do not necessarily need to be in a client’s best interest. For instance, when comparable investments are available, an advisor has the leeway to steer a client toward the more expensive one—which in turn, may earn the advisor a fee or commission. An advisor held to the fiduciary standard would not be able to steer the client toward the more expensive option because paying a higher fee would not be in the client’s best interest.

In addition, under the suitability standard, the need to disclose potential conflicts of interest is not as strict of a requirement as it is under the fiduciary standard.

Fiduciary vs. Suitability: Hiring a Financial Advisor

As a self-directed investor, you and your financial advisor are responsible for evaluating the merits of all investments that you decide to own in your IRA. Self-directed IRA custodians like Pacific Premier Trust review deals solely for administrative feasibility—custodians do not evaluate the merits of deals and cannot offer advice. It’s important to find a financial advisor you can trust and that you understand the type of investment advice they will provide.

When interviewing a financial professional, you should ask if they are held to the fiduciary standard or the suitability standard. In addition, ask how the advisor will be compensated—whether it’s commission-based or fee-only. Fiduciary advisors tend to be fee-only, while suitability advisors tend to be commission-based.

As a self-directed investor, you are seeking a financial professional who is comfortable managing alternative investments and working in partnership to help you attain your financial goals. Asking questions upfront and understanding how a potential advisor will review investments and be compensated can help form the basis of a successful and long-term advisor-client relationship.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

Pacific Premier Trust (formerly PENSCO Trust Company) performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Pacific Premier Trust is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.