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The Public Deserves A Choice, But It’s Not Fiduciary Vs Suitability

By Michael E. Kitces, CFP, MSFS, MTAX

In the ongoing debate for the fiduciary standard in the United States, supporters of fiduciary have suggested that everyone in financial services should be subject to the standard, while those opposing have responded that consumers deserve a choice between fiduciary and suitability; in essence, they simply suggest that we should let consumers choose whatever method of financial services they prefer, and may the best model win. But to me, the choice presented is a false one: the real choice is not between fiduciary advice and suitable advice, the difference is between fiduciary advice and suitable product sales. In other words, the real choice we should present to consumers is between advice and product sales, and the real goal of financial planning regulation should be to focus on who is and is not qualified to deliver advice (and the standard to which that advice will be held).

The Fiduciary Standard

As I’ve noted previously, consumers already believe that advisors have their best interests at heart, so promoting fiduciary isn’t really about saying “you can trust me” – it’s just about bashing your competition and saying THEY can’t be trusted. And a negative advertising campaign that bashes the competition is a terrible way to advance the profession, and your own financial planning practice.

But the real point here is that the regulatory debate under Dodd-Frank of fiduciary advice vs. suitability advice is a false dichotomy; as the movement of financial planning regulation in other countries has shown, the only kind of advice is fiduciary advice, delivered in the best interests of the person receiving the advice. Merriam-Webster defines the act of advising as “to give (someone) a recommendation about what should be done” (emphasis mine); in other words, telling the person what should be done that’s in their interests is the very essence of what advice is, in the first place!

The Suitability Standard

On the other hand, the suitability standard is about offering a product for sale that is suitable – or at least, not unsuitable – given the client’s circumstances. The latter, simply put, is not a standard for advice; it’s not actually about advice at all, but simply determining whether a product being sold is so unsuitable that it’s unconscionable to allow it to be bought at all. Advice, as Merriam-Webster makes clear, it about telling someone what actually should be done, not merely what would be “not unsuitable” to buy. In fact, the existing securities regulations in the US under the Investment Advisers Act of 1940 (Section 202(a)(11)(C)) have already stated that any advice delivered in a product sales context should be “solely incidental” to the sale of the product; if the primary focus of the relationship is about the delivery of advice and/or “special compensation” is received for advice, the fiduciary standard already applies!

Accordingly, the real debate is not about whether consumers should have a choice between fiduciary or suitability; the real choice is between working with an advisor who delivers advice and working with a salesperson who sells a product. Notably, the latter is not intended in a derogatory or pejorative manner; it is simply to make the distinction between someone who offers bona fide advice – which, by definition, is in the interests of the person receiving the advice to get a recommendation about what should be done – versus someone who offers a product for sale, which is implicitly in the interests of the person or company offering the product for sale but should only be offered when it is not unsuitable to do so.

“If you don’t want to be treated as a fiduciary, that’s fine; just don’t offer advice…”

Why is this distinction of advice versus sales more important than fiduciary versus suitability? Because, cast in the context of advice versus sales, the regulatory solutions quickly become more readily apparently. The goal of fiduciary financial planners should not be to subject everyone to the fiduciary standard; it should be to subject everyone offering financial planning advice to the fiduciary standard. If you don’t want to be treated as a fiduciary, that’s fine; just don’t offer advice, and don’t hold yourself out as someone offering advice. People who offer securities or insurance products for sale would eliminate the words “financial advisor” or “financial consultant” – or especially “financial planner” – from their business cards, and simply hold themselves out for doing what they do according to their regulator: registered representative, stockbroker, or insurance agent. Those who offer advice hold themselves out as financial planners, and subject themselves to the appropriate standard.

In this framework, then, it’s not about whether consumers deserve a choice between fiduciary and suitability regulatory standards; it’s a choice about whether they want to buy their products from a salesperson, or receive advice from a financial planner. It’s a much clearer choice. Eventually, we might even see a world where a prospective buyer of an insurance policy, after being told about the policy’s benefits and features, asks the question “But is this policy right for me?” to which the insurance agent responds “Oh, I’m sorry, I can’t give you advice on that; you’d have to ask your financial planner.” The agent responds this way because he/she doesn’t want to be held to a fiduciary advice standard if he/she isn’t giving advice. And the consumer receives a genuinely clear distinction about what role the insurance agent does, and does not, serve.

In fact, arguably, consumer clarity itself is a major benefit of shifting the regulatory dialogue in this manner. While consumers have made it clear that they don’t understand the difference between fiduciary and suitability standards – as noted in the RAND study itself: “most investors believe that the financial intermediary is acting in the investor’s best interest [regardless of whether delivered from a broker-dealer or investment adviser]” – the difference between “is this person giving me advice, or not” is much clearer. Perhaps the best target for regulatory advocacy efforts is not to expand the fiduciary standard to all, but instead to remove the “solely incidental” exception for advice delivered by registered representatives, and simply make all advice subject to fiduciary.

The Bottom Line

But the bottom line is this: debating about the fiduciary versus suitability regulatory standards is a lost cause. The public doesn’t understand the distinction, in no small part because they simply cannot conceive of any advice that isn’t in their best interests, since that contravenes the very definition of advice. The real regulatory issue to the consumer is whether they are receiving advice at all, or whether they are simply being pitched a product for sale. By creating a distinction between product sales and advice, consumers can have a clear choice about which they want, and each can be regulated in its own appropriate framework. And if a product salesperson doesn’t want to be held to the regulatory standards of advice – client-centric fiduciary, with the necessary competence including education, training, experience, and ethics – that’s fine; just make it crystal clear to the buyer that no advice is being delivered. Just as so many advisors are already quick to emphasize that they are not tax advisors and cannot/do not give tax advice, so too should product salespersons make it clear that they are not financial planners and cannot and don’t give financial advice, unless they truly wish to deliver such advice and be held to the associated regulatory standard.

So what do you think? Is “advice vs product sales” a better regulatory distinction than “fiduciary vs suitability”? Does it make a clearer distinction for the public? How could we shift regulatory advocacy, lobbying, and discussions with the public if we focused the debate on separating advice from product sales, instead of fiduciary from suitability?


Michael E. Kitces, CFP, MSFS, MTAX, is the Director of Research for Pinnacle Advisory Group. In addition, he is the publisher of The Kitces Report, and the blog Nerd’s Eye View, through his website, dedicated to advancing knowledge in financial planning.

1 comment to The Public Deserves A Choice, But It’s Not Fiduciary Vs Suitability

  • This is a clear and viable approach.
    However, the devil is in the details. What bona fide advice and fiduciary planning actually means in the daily practice and how to control planners in this regard all around the globe?
    The fiduciary duty has a history of some 5k years, there are centuries of track records of peer review in other industries and first experience with fiduciary based peer review in financial planning available as well. I’m afraid no fast lane forward to see…
    Implementation might turn out to be a far more complex challenge with an earthquake-like impact. For the “industry” I mean, not the client…

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