Suitability vs. Fimages (1)iduciary

You have been working hard.  Saving, investing, and dreaming of someday retiring and enjoying the fruits of your labor.  Whether you feel you have done well, or are maybe feeling embarrassment for being under prepared, you take the step to go see a financial advisor for a checkup.  Perhaps like your last visit to the doctor for a physical, a bit of nervousness hits as you drive to meet your potential advisor.

Regardless of how many financial advisors you have interviewed, there is one important question they should have all been asked.  “Do you act as my fiduciary, or is it just your job to find suitable investments?”

What is suitability?

A condominium might be suitable for your family of 4, but a house with a yard for the kids might be best.  A red sports car might also be suitable to get from point A to point B, but a minivan might be best.

If you are interviewing or working with someone whose firm is not a Registered Investment Advisor (RIA), then most likely they will make investment choices based on suitability.  They will look at your income and your age and present investment decisions for you based upon that information.  Often these advisors work for a Broker/Dealer which promotes certain products and they earn their living from commissions made on the products they sell.

An annuity with a 4% commission fee to the advisor might be suitable for you.  A mutual fund with a 5.25% upfront load might be suitable for you.  Common stock in an alcohol, weapon, or tobacco company might be suitable for you.  While suitability is not in question in these situations, whether they are “best” for you may very well be.  These decisions can be made based on a chart.  You may find that they may not be best for you financially or ethically.

What is a fiduciary?

As mentioned earlier an advisor working with an RIA follows a different methodology for selecting investment options for you.  They are legally bound to make investment selections based on who you are, not what you are relative to some rubric.   To facilitate this approach they charge a fee for their services.  Often for money management this fee may be a percentage of the assets you place under their management.  They do not earn a commission by trading your account or selling products like annuities.  Likewise, you can designate areas where they can or cannot invest your dollars.  If you indicate you do not want your money directly invested in weapons manufacturers, they cannot do so.  It is not what is best for you.  You may choose your own consciousness over an investment with higher return potential.  That fiduciary can illustrate what the trade-off may be if you are unsure.

Many fiduciaries work on a discretionary basis, meaning that once you establish your investment criteria and goals they won’t call you to sell a product and they won’t call you when making changes to your investment portfolio.  They know what is right for you and can act quickly and accordingly if the investment horizon so dictates.  If you are out of town on vacation and the fiduciary feels an immediate change is in your best interest, they can make that change and not wait a week for your approval.

Who is best for you?

Ultimately the decision to work with a fiduciary may or may not be important to you.  It is important to understand that a fiduciary functions with a much higher standard of care than an advisor presenting choices based on suitability.  They will spend more time determining if an investment strategy is appropriate to meet higher education, retirement, or estate goals than finding the current “hot stock” on the market.

Very often a fiduciary, will recommend you go through a financial planning process so that they can prudently determine which investments will meet your goals both today and tomorrow.  They may change a fee for this plan, as it does entail considerable work to ensure with certainty they can provide what is best for you.  You may find that through this process many questions about you as an individual or family are asked, and not just those relative to your balance sheet.  A plan might determine that a commission product like an annuity or insurance is actually best for you, and they can work with your existing insurance advisor or suggest others whom can provide that crucial piece.  At times that may mean fewer dollars available for the fiduciary to manage, but what is best for you is paramount.

As someone who has taken the bold step to choose an advisor, it is important to know how they do business and how they will represent you.  Location, personality, and referrals may all be a determining factor in whom you choose to work it, but the question of suitability vs. fiduciary should also be given your consideration.

Mackey Advisors™ is a registered investment advisor with a fiduciary standard.  We have chosen this model because we feel that it is the best way to serve our clients.  As prosperity coaches we empower clients to make conscious choices, not reactive decisions.  In fairness, our model may not be for you, however we encourage everyone to explore their options thoroughly and make the decision of whom to work with in confidence.