Make sure your assets get the highest standard of care

Marijoyce Ryan, The Daily Record Newswire

As an investor, how can you be sure that your investment manager is providing you appropriate advice in terms of how your assets are invested? Is this something you ever think about? It should be. The difference is significant.

Basically, there are two standards of care. One is the “Suitability Standard” and the other is the “Fiduciary Standard.” Let’s look at the details:

The Suitability Standard requires the manager to:

• Know the client and their financial situation well enough to understand their financial needs; and

• Recommend suitable investment vehicles based on the client’s financial needs.

The Fiduciary Standard requires the manager to:

• Put the client’s best interest first;

• Act with prudence; that is, with the skill, diligence and good judgment of a professional;

• Do not mislead clients; provide full and fair disclosure of all important facts;

• Avoid conflicts of interest; and

• Fully disclose and fairly manage, in the client’s interest, unavoidable conflicts.

The Securities and Exchange Commission requires that all Registered Investment Advisory Firms adhere to the fiduciary standard. This means that your manager must act exclusively in your best interest, provide sound advice and invest your assets in a manner that is most beneficial relative to your needs. Also, other considerations include whether the fees are reasonable, whether the investments are adequately diversified and consistent with the governing documents for the portfolio, among others. Conflicts of interest must be avoided — meaning, Registered Investment Advisory Firms cannot recommend financial instruments where the RIA receives compensation for the transaction.

Who must abide by the suitability standard? Brokerage firms, banks, insurance companies, financial planners, wealth managers, etc. If they are not registered with the SEC as a Registered Investment Adviser, they are not held to the fiduciary standard. This means that a financial advisor may recommend a fund that is generally appropriate for a client’s long-term investment needs even if another similar fund exists with better long-term performance and lower fees. The advisor is under no obligation to disclose these details to you, including the fact that some sales will generate higher commissions for him/her.

Under the suitability standard, investors may be harmed if they choose a financial advisor under a mistaken belief that the advisor is required to act in their best interest when that is not the case. They may receive advice that complies with the suitability standard but carries additional costs or risks without providing additional benefits; or they may fail to receive the ongoing account oversight that they expected.

The fiduciary standard requires that the client’s interest comes first and is the only interest that matters. Period.

So, as an investor, understanding the suitability vs fiduciary standard is very important. Ask yourself … do you want the highest standard of care regarding your assets? If so, seek a manager who adheres to the fiduciary standard.


Marijoyce Ryan, CPP, is vice president of Fiduciary Services for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534 (585) 586-4680.