Understanding fiduciary versus suitability standards of care and how these different standards apply to investment advisors, broker- dealer representatives and other financial advisors can be very helpful when evaluating disputes between financial services firms and investors.
The fiduciary standard of care applies to those financial institutions and advisors that charge a fee for advice. The fiduciary standard requires the advisor to put the best interests of the client first, ahead of their own; disclose any conflicts of interest; and act with prudence, meaning the skill, diligence and good judgment of a professional. The fiduciary standard of care requires that the advisor have a complete and accurate understanding of the client’s financial condition, investment goals and objectives, risk tolerance, investment time horizon, tax and estate planning goals, etc. Additionally, the advisor should always try for low cost and efficient execution of trades, again acting in the best interests of the client.
National and state banks with trust powers supervised by the Office of the Comptroller of the Currency (OCC), state banking regulators, and Securities and Exchange Commission (SEC) registered investment advisors are required to apply a fiduciary standard in their client relationships.
Broker-dealers and others compensated through commissions in recommending and selling investment products are held to the Financial Industry Regulatory Authority’s (FINRA), less stringent suitability standard of care. The suitability standard requires the broker-dealer or associated person have a reasonable basis to believe that a transaction or investment strategy involving securities is suitable for the customer. This reasonable belief must be based on the information obtained through the broker-dealer’s reasonable diligence regarding the client’s financial situation, such as the client’s age, investment experience, current financial condition, income and net worth, tax bracket and status, investment objectives, investment time horizon, liquidity needs and risk tolerance.