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On the Financial Advice “Suitability” Standard

 It  Does Not Mean What You Think

By Rick Kahkler CFP® 

If you wanted hiking footwear, you probably would be surprised if a salesperson at an outdoors store suggested flip-flops. You would expect someone knowledgeable about hiking to recommend sturdy boots or shoes more suitable for your needs.

In the same way, if you consulted someone who sells financial products, you probably would expect them to recommend investments that are suitable for your needs. In fact, securities law provides a “suitability” standard for financial advisers who receive commissions for selling products like insurance, annuities, or non-public REITs.

Definition

Unfortunately, when it comes to investments, the word “suitability” does not mean what you probably think it means. It requires only that the adviser is honest with you and that you are legally able to evaluate and purchase the product. It does not require that the product be good for you to own in terms of being best for or even appropriate for your needs.

On the other hand, securities law requires advisers who charge fees for financial advice to be held to a “fiduciary” standard, which means they must be impartial, unbiased, and work as an advocate for clients.

http://www.HealthDictionarySeries.org

Assuming a financial representative is giving you “fiduciary” advice when in fact that person is only required to provide “suitable” advice could mean the difference between investment success or financial disaster. I mean for that to sound dire and alarming, because it is. I will even dare to say that understanding the difference between fiduciary and suitable advice is more important than the investment itself.

My alarmist opinion is supported by a recent article, “The Real Cost(s) of Suitability,” by financial editor Bob Veres. To find out whether consumers are actually harmed by relying on “suitable” advice, he gathered stories from over 100 subscribers to his Inside Information newsletter, most of whom are fiduciaries.

These examples are heartbreaking.

They include:

  • Financial advisers who sold high-premium, high-commission life insurance “investments” to customers who, in some cases, had to borrow from retirement accounts or take distributions to pay the premiums—as well as pay income taxes and penalties on the distributions.
  • Financial advisers who moved customers’ conservatively invested retirements funds into high-fee annuities, promising guarantees of no losses and returns of 5% that under scrutiny proved fictitious and will never be realized.
  • Financial advisers who made excessive numbers of trades, not to benefit customers but to generate transaction fees.
  • Financial advisers whose “suitable” recommendations, in too many cases, not only reduced clients’ investment returns, but actually drained clients’ portfolios and greatly damaged their ability to provide adequately for themselves in retirement.

Veres quoted Kathleen Campbell, of Campbell Financial Partners in Fort Myers, FL, as saying, “Suitable means plenty suitable for the broker and not so suitable for the client.” She called suitability “one of the biggest farces in the financial advisory world.”

I absolutely agree. It is essential to know whether a financial representative is held to a fiduciary or suitability standard.

Here’s how to tell the difference:

  • If you pay a fee for financial advice, with no sale or obligation to purchase a product, that’s a fiduciary adviser.
  • If there is no fee, you are dealing with a “suitability standard” broker, agent, or representative who has no legal requirement to give you unbiased advice.

Assessment

Understanding when you are getting impartial advice that’s in your best interests, and when you are getting conflicted and biased advice that is in the adviser’s best interest, is critical to your financial health.

Please, be wary of advisers whose recommendations emphasize “no fees.” Their “suitable” advice may leave you in a perilous situation—one much worse than wandering through the wilderness in flip-flops instead of hiking shoes. 

Conclusion

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