Fiduciary vs. Suitability: Why You Need to Know the Difference

If you're looking for an investment advisor, know these terms

Financial advisor talking to clients
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It comes as no surprise that a lot of people out there are somewhat skeptical about hiring an investment advisor. After all, we’ve all heard the stories about the victims of the Bernie Madoff Ponzi scheme. We’ve watched movies like “Wall Street” and “Boiler Room” that leave us confused about who we can trust with our money.   

So, how do you select an investment advisor that you can trust? And how do you find an advisor that legitimately puts your interest above theirs?

If you’ve done some research into finding an ideal advisor, you may have stumbled upon two words that sound like they might mean the same thing, but in actuality have very different definitions. 

These words are fiduciary and suitability. It’s important to understand the difference between those advisors who are held to a fiduciary standard versus those who are held to a suitability standard, particularly before choosing someone who you are going to trust to manage your money.

Key Takeaways

  • Different types of financial advisors can be held to different ethical standards for managing clients' money.
  • Fiduciaries have an obligation to act in the best interests of their clients.
  • A breach of fiduciary duty can occur when an advisor who is held to a fiduciary standard puts their own interests ahead of their clients' interests.
  • The easiest way to find out if an advisor is a fiduciary is to ask.

Fiduciary Standard for Financial Advisors

The Fiduciary Standard was created in 1940 as part of the Investment Advisors Act. This standard, regulated by the Securities and Exchange Commission (SEC) or state securities regulators, maintains that investment advisors are bound to a standard that requires them to put their clients' interests above their own. The following rules fall under the Fiduciary Standard:

  • An advisor must place their interest below that of the client. 
  • An advisor is prohibited from buying securities for their account prior to buying them for a client. 
  • An advisor must do their best to make sure investment advice is made using accurate and complete information. The analysis must be as thorough as possible.
  • An advisor must avoid conflicts of interest. As a fiduciary, an advisor must disclose any conflicts of interest or potential conflicts of interest. 

If an advisor who is a fiduciary fails to uphold any of these standards, that can constitute a breach of fiduciary duty. An advisor's clients may be able to sue for damages if a breach of fiduciary duty results in financial losses.

Who Is a Fiduciary?

Technically, a fiduciary is anyone who is entrusted to make investment, money, or asset-related decisions on behalf of their clients. For example, if you establish a trust as part of your estate plan, the trustee you appoint can be considered a fiduciary.

From a financial advisory perspective, a fiduciary can be an individual financial advisor or an investment firm that employs the advisor you work with. Individuals who are Registered Investment Advisors or RIAs are held to a fiduciary standard. RIAs are required to register with the U.S. Securities and Exchange Commission and file a Form ADV.

This form is a public disclosure form that outlines how the advisor is paid, their investment strategy, and any past or current disciplinary or legal actions taken against them. You can search for and review an advisor's public disclosure using the SEC's online database.


Registered Investment Advisors can also hold other professional financial designations. For example, an RIA can also be a Certified Financial Planner (CFP) or a Chartered Financial Analyst (CFA).

Suitability Standard for Financial Advisors

Although the two terms may sound similar, there is a difference between suitability and fiduciary. Suitability means only making recommendations that are consistent with the best interest of the underlying customer. Here’s what else you need to know:   

  • Instead of having to place their interest below that of the client, the suitability standard only requires that the advisor reasonably believe that any recommendations made are suitable for the client, in terms of the client’s financial needs, objectives, and unique circumstances. 
  • Suitability means making sure transaction costs are not excessive or that a recommendation is not unsuitable for a client. 
  • Excessive trading, churning to generate more commissions, or frequently switching account assets to generate transaction income for the advisor. 
  • The need to disclose potential conflicts of interest is not as strict a requirement as it is with a fiduciary.
  • An investment for a client only has to be suitable; it doesn’t necessarily have to be consistent with the individual investor’s objectives and profile.
  • Investment advisors who are fee-based may be incentivized to sell their own products ahead of competing for products that may be lower cost. It is how they make their commissions.

Which Advisors Follow a Suitability Standard?

The suitability standard is most often associated with broker-dealers. A broker-dealer is an individual or firm that facilitates securities trades for its clients. For example, say you have a retirement account with a brokerage firm like Fidelity or TD Ameritrade. Those companies are examples of broker-dealers. You tell them which investments you'd like to buy or sell in your portfolio; they handle the processing of the transaction.

The Bottom Line

If you are interested in finding an investment advisor who is required to uphold the Fiduciary Standard, a great place to begin is by looking for a fee-only financial planner. Fee-only planners and advisors do not sell investment products, nor do they make commissions. Fee-only planners charge a fixed price and aren’t driven by selling any kind of product. Their advice is held to the highest standard, and they are required to put their clients’ interests above their own. 

That's different from a fee-based advisor. Fee-based advisors make their money through a combination of fees and commissions. This means that, if you purchase a particular investment that they recommend, they earn a percentage of what you invest as a commission. To find a fee-only financial planner near you, check out the Nation Association of Personal Financial Advisors.

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  1. "SEC Fiduciary Standard."

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