Forward Thinking
Forward Thinking
September 16, 2019
5 min read

Understand fiduciary vs suitability standards of investment advisors

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In the first part of this three-part series, we discussed potential pitfalls of investing alone, without the assistance of a professional. This article focuses on the type of professional duty a financial advisor has to a client and why that is important to understand when deciding who to trust with one’s hard-earned savings.

We will explore one fundamental difference between two types of financial advisors that exist in the marketplace — those who have a fiduciary duty to their clients and those who do not. For orthopedic surgeons, understanding this difference is fundamental to making good decisions with their investments. For millennial orthopedists, the earlier they learn this difference, the better because compounding assets at a higher rate, even if fractional, could result in a substantially higher net worth when they reach retirement age.

Sanjeev Bhatia

Fiduciary vs suitability standards

The distinction between a fiduciary and suitability standard revolves around the requirements for professional ethics and loyalty an advisor is held to when working with a client. Unfortunately, investors often rely on an advisor without understanding how the advisor is obligated to work with them.

The largest and most popular financial firms are broker-dealers. These are primarily regulated by the Financial Industry Regulatory Authority under standards that require them to make suitable recommendations to their clients. Instead of having to place his or her interests below that of the client, the broker-dealer’s suitability standard requires only that a broker-dealer reasonably believes that any recommendations he or she makes are suitable for the client. There is a key distinction to understand about loyalty here as well, because a broker’s duty is to the broker-dealer for which he or she works and not necessarily to the client.

Try not to focus on the term “broker.” Many firms have realized the negative implications this term has and have begun referring to members of their sales force as “financial advisors,” a term that may be encountered in advertisements and marketing materials.

In contrast to large broker-dealers, a Registered Investment Advisor (RIA) is an advisor or firm engaged in the investment advisory business and registered either with the Securities and Exchange Commission or state securities authorities. An investment advisor under the RIA model has a fiduciary duty — a fundamental obligation — to his or her clients to provide suitable investment advice and always act in the clients’ best interests.

RIAs are the most popular, but not the only, subset of advisors who adhere to the fiduciary standard. When choosing a financial advisor, research your options carefully and ask at least one simple question, as discussed later in this article. Additionally, it is critical that an orthopedic surgeon ensures his or her advisor is working based on the investment time horizon, risk tolerance and financial goals of the surgeon and his or her family.



Orthopedic surgeon A contacts his broker (or “financial advisor”) and expresses an interest in investing $50,000 in U.S. growth stocks. The broker invests the client assets in Fund XYZ, which charges a sales load of 5.75% with operating expenses of 0.68% annually. The client (surgeon) will immediately pay a one-time fee of $2,875 on the trade on top of the recurring fund management fee. In this case, the suitability standard has been met.

Orthopedic surgeon B contacts his RIA with the same request. The investment advisor purchases an exchange-traded fund with a gross expense ratio of 0.18% and pays a $8.95 commission on the trade. This surgeon pays his RIA a management fee of 1% of the assets, which equates to $500 per year on $50,000. The advisor has met the fiduciary standard.

David B. Mandell

In this example, the front-loaded fees paid by orthopedic surgeon A are significant enough to require a commitment of about 9 years to this fund family before the commission that was paid equals the sum of the advisory fees that orthopedic surgeon B paid.

Legal background

Some orthopedists may wonder why regulators allow this fundamental difference in financial advice to continue seemingly unbeknownst to most investors. In the last decade, the Department of Labor set out to change this, in terms of its impact on qualified retirement plans (QRPs), including 401(k)s, profit-sharing plans and individual retirement accounts. Specifically, the department was concerned about conflicts that may incentivize advisors to promote products within these plans that are not in the best interest of the investor, such as those offered by the firm the advisor works for, which are called proprietary funds, or those that pay higher commissions. These conflicts occur regularly in the QRPs of U.S. medical practices.

The department proposed new regulations on April 14, 2015, and final rulings were issued April 6, 2016. The “fiduciary rule,” which required a fiduciary standard for brokers when they advise clients of retirement plans, immediately came under attack. By January 2017, a bill was introduced to delay the start of the fiduciary rule for 2 years.

By May 2018, the 5th U.S. Circuit Court, which is one level below the Supreme Court, ruled that the Department of Labor overreached by requiring brokers and others who handle investors’ retirement savings to act in clients’ best interests. “The rule is unreasonable,” the decision read, with the court finding fault in the department’s broadening of what is deemed financial advice and who gives it, among other issues.


Despite the court’s decision, the department said it will continue to rely on the regulation for now to govern advice in retirement accounts. The department delayed full implementation of the rule until July 2019 while it conducted a review mandated by President Trump that could lead to major changes. The July deadline has now been pushed to December 2019 and appears to be in jeopardy with the recent resignation of Secretary of Labor Alexander Acosta and subsequent nomination on July 18, 2019, of Eugene Scalia to replace Acosta. Scalia was the lead attorney for the securities industry in attacking the department rule and it seems likely he will be confirmed as the new Secretary of Labor in the fall.


Given this situation, this is most important question an orthopedic surgeon can ask a current or prospective financial advisor: Do you have a fiduciary duty to me, to put my best interests before yours? The question seems simple, but often investors never ask this question and continue to work with advisors who would fail this test of their fiduciary duty. Furthermore, even if an advisor states he or she has a fiduciary duty to you, an orthopedic surgeon should confirm that his or her advisor is working based on the investment time horizon, risk tolerance and financial goals of the surgeon and his or her family.

Understanding how advisors make money and whether they owe their duty to their clients or their firms is paramount in finding the right professional to help you achieve your long-term financial goals. Equally crucial is ensuring your advisor understands you and your family’s financial goals.

Disclosures: Bhatia and Mandell report no relevant financial disclosures.