Good morning & happy Monday!
“Suitability means selling a suit that fits you. Fiduciary duty means it actually has to look good on you.”
– Michael Kitces
One thing that is discussed frequently in financial circles and I am personally asked regularly is, “Are you a fiduciary?”
For me, the answer is YES. I have been a fiduciary since 2011 when I earned my CFP® (CERTIFIED FINANCIAL PLANNER™) designation. All CFPs® are fiduciaries.
But what does that mean? And does it really matter?
In case I haven’t been nerdy enough the last few weeks, let’s dive in 😉. I’ll try to keep it short and sweet.
A fiduciary is a professional who is legally required to place the client’s best interest ahead of their own (or their firm’s) interest—always. No exceptions, no wiggle room.
That’s pretty straightforward, and I think that many consumers feel that should be the standard for the entire industry (many in our industry are pushing for that, but I’ll save you all the inside baseball on that topic).
So, what is the other standard out there? In other words, if one is not a fiduciary, what is their deal?
A non-fiduciary (typically a broker-dealer rep under Reg BI) must recommend products that are suitable for the client but are not required to put the client’s interest first.
So, basically, a fiduciary must always do what is best for the client whereas a non-fiduciary just must do what is suitable for the client. What’s best for clients (fiduciary) vs. what’s suitable for clients (non- fiduciary). Prudent expert (fiduciary) vs. reasonable basis (non-fiduciary).
It may seem like a nuanced difference, but it’s actually worlds apart.
Let’s look at just a couple of quick examples and I’ll wrap up, I know this is a boring topic. 😉
A client comes into an investment professional’s office with $1,000,000 to invest. A fiduciary will thoroughly interview the client and extensively examine a plethora of investment options and recommend the investment allocation that he/she believes to be the best solution for the client, based on the client’s goals and objectives. A non-fiduciary, by comparison, is only required to have a reasonable basis that his/her recommendation is suitable.
Suitable or best. Which do you want?
If you want best, then you need a fiduciary standard.
I can go to a restaurant and ask the server what they recommend and they could say “Well, nothing on this menu is going to kill you so whatever you want.” Well, that’s a ‘suitable’ recommendation, he/she is not wrong … nothing on that menu is likely to kill me 😉
But if the server asks me a few important questions (example: “Tell me, what type of food do you most like?” or “Why did you choose to eat here?”) and then proceeds to give me a few specific menu recommendations based on how I answered the questions, that would be more like a fiduciary.
Not that there is such a standard at a restaurant, but the difference between a snarky, “What do you want?” and a genuine, “How can I make this an amazing dining experience for you?” will be a large determining factor if that meal is enjoyable or not.
A suitability standard is fine for transaction-based financial transactions such as buying a life insurance policy or a bank CD. There aren’t a lot of questions asked and the person on the other end of the transaction does not need to know a lot about you to do their job well.
In my banking days (age 18-28, as a non-fiduciary) if a client came in and saw an ad in the newspaper for a CD, they came into the bank with the intention to purchase that CD … all they needed me for was to execute on the transaction. My job was just to make sure I was not causing harm to them … to make sure the CD purchase was suitable.
In crafting a lifetime, and even multi-generational, financial plan that encompasses asset allocation, asset location, ongoing portfolio monitoring and management, portfolio rebalancing, and tax strategies all customized for each individual client based on their goals, objectives, timeframe and risk tolerance … yeah, there I would most certainly want to make sure to have a fiduciary on the case. 😊
Please know that I take this fiduciary standard very seriously. The management of your financial resources is a great honor, but also a tremendous responsibility that I take with the utmost seriousness.
I am so grateful that you have chosen me for this task. I commit to continuing to grow and learn and be the best I can be for you … my clients and friends.
If there are ways that I can support you further, please do not hesitate to reach out.
Make it a great week ahead.