There are a lot of financial advisors out there, so how can you tell that your financial advisor is really working in your best interest? They may say they put your financial interests first, and they may even believe that they are. However, unless they are a Registered Investment Advisor (RIA) legally held to a fiduciary duty to act in the best interest of their clients, their loyalty may be to the firm they work for, not you.

Financial advice is an industry, not a profession. While no one can just call themselves a doctor or a lawyer, the guidelines for who can call themselves a “financial advisor” are much less defined. Here’s the important distinction: there are two very different industry standards that financial advisors can choose to work under – a fiduciary standard or a suitability standard. That means clients who hire a financial advisor are also choosing a higher or lower standard, though they may do so unknowingly.

The differences between advisors who work under the suitability or fiduciary standard are in how they are compensated, who they answer to, and whose interest they work for. In other words, follow the money.

What is the Fiduciary Standard?

An advisor who agrees to be held to a fiduciary standard is legally obligated to put their clients’ needs above their own 100% of the time. They are independent and registered as Investment Advisors (RIAs) with the U.S. Securities and Exchange Commission (SEC) or a state securities authority.

One could argue that every financial advisor should be required to act in their clients’ best interests. Yet, only about 10% of advisors are fiduciaries. Most are representatives who work for brokerage firms and earn commissions. Advisors who are fiduciaries, on the other hand, charge advice fees that come directly from clients. They’re referred to as “fee-only.” The definition is strict: fee-only fiduciary advisors do not accept commissions or kickbacks that present a conflict of interest because their loyalty is to you, the client.

Whenever the financial interests of the client are not aligned with the financial incentives of the advisor, these conflicts surface. Much like if you were prescribed medication and then later learned that your doctor was getting paid by the drug company to recommend that particular drug, you’d never really know whether the doctor’s acting in your best interest or not. If you have a dispute with an advisor legally held to the fiduciary standard, it’s the advisor who has to prove the advice was in your best interest. This is not the case for advisors who are not fiduciaries.

What is the Suitability Standard?

Advisors who choose to work at brokerage firms operate under a sales model. As such, they abide by a different set of regulatory rules known collectively as the suitability standard. The brokerage advisor’s role as a Series 7 licensed representative is to develop new business that will generate sales and drive revenue to the firm. The advice you receive from a brokerage (Series 7) advisor doesn’t have to meet the higher fiduciary standard and may or may not be in your best interest. Brokerage advisors provide clients with recommendations deemed merely as “suitable.”

An advisor working under the suitability standard can help you work toward your financial goals and may put your best interests first, but isn’t obligated to do so.

Some financial advisors opt to receive both commissions and collect fees from clients. These are hybrid advisors. They’re independent and registered with the SEC, but they may also have a Series 7 license tied to a broker or licensed to sell insurance. In other words, they try to wear two hats. This dual compensation model is known as “fee-based.” In reality, there’s no such thing as a “part-time fiduciary.” Advisors have to pick a lane and choose one standard or the other, not both. Likewise, individual consumers also need to consciously choose between the two.

That doesn’t mean all advisors held to the lower suitability standard are slick sales people. But here’s the legal distinction: If the sales advisor only has to show that an investment is suitable for you, and later there’s a dispute where you feel the investment risks weren’t fully explained, the burden of proof is on you to show evidence that you were harmed financially as a result of that recommendation. In fact, the moment you sign a new account agreement with a brokerage firm, you’ve waived your right to sue in a court of law and instead agree to bring the complaint to arbitration.

Advisors working under the Suitability Standard are regulated by the Financial Industry Regulatory Authority (FINRA). FINRA is a “self-governing” organization, so its arbitration panel is made up of its own industry peers, which is like asking the wolves to guard the chicken coop. Case in point, FINRA reports that just about 18% of customer arbitration cases between 2012-2016 were awarded to clients.

Fiduciary financial advisors (RIAs) are different. They can be sued in court and must prove they did not breach their fiduciary responsibility.

Beware of Rogue Fiduciary Advisors

Every advisor, whether at a brokerage firm or an independent Registered Investment Advisor, must be either licensed by FINRA or registered with the SEC or state regulators. Anyone operating as a financial advisor who is not licensed or registered is considered “rogue.” When you search a regulator’s database and don’t find an advisor’s background records, that’s a huge red flag.

And even fiduciary advisors can be either “bad apples” or go “rogue.” Advisors held to a higher standard don’t necessarily have to uphold the code of ethics they are required to follow. No one can force an advisor to follow fiduciary best practices. But the stakes are much higher. Any fiduciary advisor who does breach their fiduciary responsibility knows they can be sued and potentially lose their livelihood.

Most advisors aren’t crooks, but they don’t all meet the highest standard either. There’s tremendous ambiguity in the financial services industry. Every advisor (and firm) has to be thoughtfully vetted before you pay them to advise you on your life savings.

How Do You Vet a Financial Advisor to Ensure They Work in Your Best Interest?

First and foremost, ask the advisor to provide you with a fiduciary oath in writing on their firm’s letterhead. If it’s unclear whether they operate under a fiduciary or a suitability standard, ask who is paying them. They should disclose in writing all sources of compensation they receive. Advisors registered with the SEC or state securities office are required to be fully transparent about fees. Brokerage firms are not. Independent advisors registered with the SEC or the state must file a Form ADV that discloses their fee structures, including whether they have any ties to brokerage firms or insurance companies or accept commissions.

Further, you can research an RIA’s background, fee structure and disciplinary history on the Investment Advisor Public Disclosure website. For advisors working at brokerage firms, BrokerCheck will provide background information for brokerage advisors who hold a Series 7 (sales representative) license.