Fiduciary vs. Suitability: Why You Need To Know The Difference

If You're Looking For An Investment Advisor, Know These Terms

Financial advisor talking to clients
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It comes as no surprise that a lot of people out there are somewhat skeptical about hiring an investment advisor. After all, we’ve all heard the stories about the victims of the Bernie Madoff Ponzi scheme. We’ve watched movies like “Wall Street” and “Boiler Room” that leave us confused about who we can trust with our money.   

So, how do you select an investment advisor that you can trust? And how to do you find an advisor that legitimately puts your interest above theirs?

If you’ve done some research into finding an ideal advisor, you may have stumbled upon two words that sound like they might mean the same thing, but in actuality have very different definitions. These words are fiduciary and suitability. It’s important to understand the difference between those advisors who are held to a fiduciary standard versus those who are held to a suitability standard, particularly before choosing someone who you are going to trust to manage your money.


The Fiduciary Standard was created in 1940 as part of the Investment Advisors Act. This standard, regulated by the SEC or state securities regulators, maintains that investment advisors are bound to a standard that requires them to put their client’s interests above their own. The following rules fall under the Fiduciary Standard:

  • An advisor must place his or her interest below that of the client. 
  • An advisor is prohibited from buying securities for his or her account prior to buying them for a client. 
  • An advisor must do his or her best to make sure investment advice is made using accurate and complete information. The analysis must be as thorough as possible.
  • An advisor must avoid conflicts of interest. As a fiduciary, an advisor must disclose any conflicts of interest or potential conflicts of interest. 


Although the two terms may sound similar, there is a difference between suitability and fiduciary. Suitability means only making recommendations that are consistent with the best interest of the underlying customer. Here’s what else you need to know:   

  • Instead of having to place his or her interest below that of the client, the suitability standard only requires that the advisor has to reasonably believe that any recommendations made are suitable for the client, in terms of the client’s financial needs, objectives and unique circumstances. 
  • Suitability means making sure transaction costs are not excessive or that a recommendation is not unsuitable for a client. 
  • Excessive trading, churning to generate more commissions or frequently switching account assets to generate transaction income for the advisor. 
  • The need to disclose potential conflicts of interest is not as strict a requirement as it is with a fiduciary.
  • An investment for a client only has to be suitable; it doesn’t necessarily have to be consistent with the individual investor’s objectives and profile.
  • Investment advisors who are fee-based may be incentivized to sell their own products ahead of competing products that may be lower cost. It is how they make their commissions.

Bottom Line

If you are interested in finding an investment advisor who is required to uphold the Fiduciary Standard, a great place to begin is by looking for a fee-only financial planner. Fee-only planners and advisors do not sell investment products, nor do they make commissions. Fee-only planners charge a fixed price and aren’t driven by selling any kind of products. Their advice is held to the highest standard, and they are required to put their clients’ interests above their own. To find a fee-only financial planner near you, check out the Nation Association of Personal Financial Advisors at 

Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.