Fiduciary vs. Suitability: A Standard of Care Comparison Table

Michael Burton, CFP®, LHICComparison Tables, Compensation, Fiduciary Standards

Fiduciary vs. Suitability

Introduction to The Fiduciary vs. Suitability Chart

The life insurance industry is spending billions of dollars through a fierce political lobby to protect its sales force from being held to the highest standard of professional accountability: the fiduciary standard.  An obvious question is, why?  It’s a more involved question with more complex answers than I will explore in this post.

The chief and most disturbing problem I observe is that consumers are confused, muddled about the importance of the issue.  But no, it’s even worse: most consumers don’t even know there is an issue at all!

And so, with a mind to both sounding the alarm and perhaps dispelling some of the confusion in this area, I offer the following Fiduciary vs. Suitability comparison in an expandable table format.  This is not an exhaustive comparison, but a candid one, one that I hope consumers will be able to read and appreciate.

(Mobile phone user: because you are viewing the Fiduciary vs. Suitability comparison on a small screen, the side by side aspect of this table has been sacrificed in order to make the content more readable in your device’s browser.)

Fiduciary vs. Suitability:
A Standard of Care Comparison Table

Click on the expandable content below to learn more about each bullet point.
The fundamental question that governs an advisor operating under a fiduciary standard of care is this, “Is the advice I have given or product I have offered the very best solution possible for the client?”  The Fiduciary Standard of Care demands that an advisor aim for the center of the target. It is the highest possible burden of care.
According to a definition of fiduciary provided by the Securities Exchange Commission, fiduciaries owe their clients a duty of undivided loyalty and utmost good faith.
A financial services professional operating under the fiduciary standard of care must proactively disclose to you all manner of compensation from third parties, from commissions to sales contest prizes, as well as any other conflicts of interests that may exist prior to or during the client-adviser relationship. Moreover, an adviser operating as a fiduciary must obtain your informed consent to those conflicts of interest.
Regulatory bodies (such as the Securities and Exchange Commission) require written notices and disclosures that are signed in order for an adviser acting as a fiduciary to be in compliance with the law. Furthermore, the highly regarded CERTIFIED FINANCIAL PLANNER(r) BOARD OF STANDARDS requires written contracts to govern all financial advisory relationships that rise to the fiduciary standard.
A fiduciary must provide full and fair disclosure of all material facts to a client. If any reasonable person would want to know any particular fact, it is the fiduciary’s obligation to provide that fact. He/she cannot allow the client to remain “in the dark” about any important facts.
Arbitration statistics from the Financial Industry Regulatory Authority show that in 2008 there were 2,838 cases served that involved breach of fiduciary duty, vs. 1,181 for unsuitability. David Serchuk, Forbes Magazine. Suitability: Where Brokers Fail.

While some might conclude from the statistic above that fiduciary relationships are more likely to end in conflict; it is far more appropriate to conclude that breaches of fiduciary duty are easier to establish and prove in court. Therefore, many more of these disputes – almost three times as many – are litigated.

Consider that there are an estimated 643,000 individuals operating as registered brokers under the suitability standard vs a mere 12,000 operating as investment advisors under a fiduciary standard.

Now, I’m no statistician; so I’m not sure it’s entirely reasonable to use the above to arrive at predictive ratios. But, if it were . . . it would suggest that if all of the brokers operating under the suitability standard in 2008 were to be held to a fiduciary standard, that faction of professionals would have received 154,320 cases served in 2008 vs. the 1,181 it actually received.  (Yikes!)

It should be no wonder that the life insurance industry is eager to avoid being held to this standard of care.  Its legal costs will skyrocket.

Click on the expandable content below to learn more about each bullet point.
The fundamental question governing an advisor operating under a suitability standard of care is, in common terms, “Is anything I’ve advised or recommended going to harm the client?”  Another way to put it:  “Based on all I know about the client, is anything out of bounds?”

If an underwhelming house brand . . . lines up with the vague outlines of what is considered suitable [the adviser] can still push it, even if it costs more to own, or underperforms peer [products].David Serchuk, Forbes Magazine. Suitability: Where Brokers Fail. Forbes Magazine, 6/24/2009.
However noble it might sound, the suitability standard, practically speaking, is close kin to the “buyer beware” standard you’ll find at work on a used car lot. Make no mistake, any adviser operating under the suitability standard of care may not be regarded legally as being on your side of the table. He/she is not your adviser. He/she is your salesperson.

“Brokerage customers are, in a certain sense, deceived. If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not.”Professor Arthur Laby, former assistant general counsel at the Securities and Exchange Commission
Unless the financial products under consideration are classified as a security under statutory law, the financial services professional has no duty to tell you any details about how he/she is being compensated for his/her services. Because most forms of life insurance (including term life insurance, traditional whole life insurance, traditional annuities, disability insurance, long term care insurance, health insurance, and even the increasingly popular stock-market-indexed products) are NOT deemed to be securities, no consumer disclosures are legally required.
The relatively few financial services professionals who obtain the Chartered Life Underwriter (CLU) designation or the Chartered Financial Consultant (ChFC) designation (maybe 1 in 30?) are required to adopt a code of ethics to treat their clients as they would like to be treated themselves. These code of ethics governing these designations does not, however, require any such commitment (and certainly not a fiduciary commitment) to be put in writing. Indeed, it appears that at least one major financial/insurance company in America actually required its agents to relinquish the CFP® designation because the CFP® Board requires CFP® certificants to operate under the fiduciary standard of care..
Under the suitability standard, the agent is not allowed to misrepresent any material facts. In other words, he/she can’t lie. But the agent has no overt duty to clarify something about which the client is mistaken, or to disclose the answers to important questions that that client may not know he/she needs to ask. Unfortunately, this often leads to situations where clients are left with large “blind-spots” in their purchase decisions.
Because the information gathering requirements under a suitability standard are so spartan in comparison to that which a fiduciary must collect, the range of “suitable” alternatives becomes very large. And the lines between what is suitable and unsuitable can become blurred.

Furthermore, because the competitive costs of a product (both internally and externally) are not factors that carry any weight in determining whether a product is suitable, establishing noteworthy damages (read: financial losses worth splitting with the attorney who helps recover them) is a significant challenge.

Is it any wonder that relatively few breaches of the suitability standard are pursued in the courts?

A Definition That Cuts Through The Clutter

[Being a fiduciary] means that you have a fundamental obligation to act in the best interests of your clients and to provide . . . advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client, and you should take steps reasonably necessary to fulfill your obligations. You must employ reasonable care to avoid misleading clients and you must provide full and fair disclosure of all material facts to your clients and prospective clients. Generally, facts are “material” if a reasonable [buyer] would consider them to be important. You must eliminate, or at least disclose, all conflicts of interest that might incline you — consciously or unconsciously — to render advice that is not disinterested. If you do not avoid a conflict of interest that could impact the impartiality of your advice, you must make full and frank disclosure of the conflict. You cannot use your clients’ assets for your own benefit or the benefit of other clients, at least without client consent. Departure from this fiduciary standard may constitute “fraud” upon your clients.The Staff of the SEC's Office of Compliance Inspections and Examinations

Articles/References Cited or Used

© Michael C. Burton, 2016 and all years.

About the Author

Michael Burton, CFP®, LHIC

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Michael lives in Austin, Texas with his wife, son, and daughter. When he's not designing flag football plays for little boys who will surely have no idea what he's talking about, Mike dedicates himself to providing life insurance advice that puts the client's interests first, no matter what.