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Advisor vs. Broker

What is the difference between the two standards of advice in the financial industry?

Fiduciary standard
The fiduciary standard requires advisors to put their clients’ best interests ahead of their own.  If two equal products have different fees, the advisor is compelled to recommend the one with the least cost to the client, even if it will bring less revenue to the advisor. This concept is further explained here.

Suitability standard
In the suitability standard, advisors are merely required to ensure that investment options fit clients’ objectives, time horizons, and experiences. It is further explained here.

At MWA, we believe that investment advisors owe a fiduciary duty to their clients. As such, they stands in a special relationship of trust and confidence. As fiduciaries, investment advisors have an affirmative duty of care, loyalty, honesty, and good faith to act in the best interests of clients. The parameters of this duty depend on the scope of the advisory relationships and generally include the following: (1) placing the interests of clients first at all times; (2) having a reasonable basis for investment advice; (3) seeking best execution for client securities transactions in which the advisor directs such transactions; (4) making investment decisions consistent with any mutually agreed-upon client objectives, strategies, policies, guidelines, and restrictions; (5) treating clients fairly; (6) making full and fair disclosure to clients of all material facts about the advisory relationship, particularly regarding conflicts of interest; and (7) respecting the confidentiality of client information.

This fiduciary duty differs from the suitability obligations that govern brokers and insurance agents. The suitability standard merely requires advisors to make recommendations that are “suitable” or “okay,” allowing them to recommend funds that pay them more without disclosing extra compensations, as long as the funds are deemed suitable. Understandably, there is a significant difference in the advice of a fiduciary (“best advice”) versus a suitability (“okay advice”) advisor.