So what are the key differences between the suitability and the fiduciary standard?
At one level, the difference is simple, though the legal niceties obviously can get complicated.
Under the suitability standard, your financial professional is obliged to offer investment products that are suitable to your situation. If a stock index fund is appropriate for you, she is entitled to offer you one with annual management expenses of 1% when a similar one is available at one-tenth the cost. She doesn’t even have to tell you that the cheaper product is available.
Under the fiduciary standard, she cannot do that. She must maximize your financial returns and inform you of all pertinent information, including her own potential conflicts of interest. In your financial dealings, you want a fee-only advisor who commits to a fiduciary standard. That way you are the only person paying this person for the advice they are offering you, and they are legally obligated to advance your financial interests.
The below table, drawn from Michael Chamberlain at 401khelpcenter.com helpfully spells out the differences. Mr. Chamberlain’s article provides more information on these points.
An even more valuable chart is drawn from the “Guide to Brokerage and Investment Advisory Services at Fidelity Investments.” This is the disclosure paperwork that everyday investors actually receive from their brokers and usually ignore. I put their text into table form.
Under which column would you prefer in your dealings with a financial professional? I believe this question answers itself.