“Fiduciary” vs. “Suitability” Standard – What Is It, What It Means

You may have come across the term “fiduciary standard” in context of your retirement and investment planning reading.  As recently as April, the term was even being tossed around the halls of 1600 Pennsylvania Ave, when the White house officially asked the Department of Labor to consider new regulations requiring ‘across-the-board fiduciary standards’ for advisors and brokers who work with retirement accounts.

The idea behind the proposed regulation is to eliminate any conflict of interest advisors may have when giving advice on investments within 401(k)s and IRAs, which the Department of Labor says remains possible for advisors adhering only to the “suitability standard.”

Wait a second…suitability standard? Fiduciary standard? You may be wondering what this all means, and whether it has any direct impact on how you choose an advisor or what you can expect from your advisor. Below, we’ll clear it all up for you as concisely as we can.

Differentiating Between the Fiduciary Standard and the Suitability Standard

When you work with a broker or a financial advisor, they are essentially giving you investment advice in one of two ways: either according to the fiduciary standard, or the suitability standard.

The fiduciary standard is pretty ‘cut and dry’ and easy to understand. It basically states that a financial advisor’s highest priority must be to make investment/financial recommendations with a client’s best interests in mind.  Making recommendations this way implies that an advisor is recommending an investment because they believe it does an optimal job of meeting a client’s goals and objectives. It’s important to note, however, that acting in a client’s best interest does not imply the recommended investment(s) will in fact meet the client’s objective.

The suitability standard has a nuanced but distinct difference from the fiduciary standard. It essentially states that the advisor only needs to ensure the recommended investment is “suitable” for their clients. The suitability standard therefore allows advisors and brokers to recommend proprietary or other investments that may provide the advisor direct compensation – for instance, in the form of commissions – as long as the investment is compatible with the client’s goals and objectives.

To be sure, an advisor operating under the suitability standard can also be acting with their client’s best interests in mind – they just may use their own proprietary products to accomplish that end. As stated before, it can ultimately be a nuanced distinction.

The Bottom Line for Retirees

The proposed legislation still has a long road ahead, and it may not be until next spring before we see any action on it (if we do at all). But, even with or without the new rules, the formula for choosing the right advisor still remains the same in our view. You want to work with someone you can trust, who has a demonstrated track record of success, and who will provide you with the level of service you require. If you can package those three qualities into one trusted advisor, you are probably on the right track to achieving your vision of retirement.


Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney- client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.

Disclosure

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.