US expats looking for financial advice are faced with a number of options. Financial advisors for expats who offer investment advice can be broadly divided into two groups though: those that comply with a Fiduciary Standard, and those that comply with a Suitability Standard. In this article we take a closer look at the difference between the two.
What is a Fiduciary Standard financial advisor?
US Fiduciary Standard financial advisors are required to put their clients’ interests above their own by the Investment Advisers Act of 1940, . They must comply to this statutory duty of loyalty and care always and in all their professional dealings, and they are regulated by the SEC (Securities and Exchange Commission), or by state securities regulators.
The requirements placed upon Fiduciary Standard financial advisors by the Investment 1940 Advisers Act are very clear and specific. For example, Fiduciary Standard financial advisors aren’t allowed to purchase an investment themselves before recommending it to a client, and neither can they prioritize any investments from which they might gain a commission.
Fiduciary standard financial advisors also have a duty to disclose any potential conflicts of interest, and to ensure that any investment advice that they give has been thoroughly and fully researched, and that the information that their advice is based on is thorough and accurate. They must also place trades efficiently and at a minimal cost.
The SEC lets Fiduciary Standard financial advisors assist individuals and institutions relating to planning for retirement, saving for college education, planning and developing investment strategies, and managing assets and portfolios, and also allows them to charge either an hourly rate, a percentage of a portfolio value, or fees on transactions.
In summary, Fiduciary Standard financial advisors for expats are federally regulated and are obliged by law to prioritize their clients’ interests above their own.
Examples of American Fiduciary Standard financial advisors are CFP™ certificants and Registered Investment Advisors, but not necessarily brokers.
What is a Suitability Standard Financial advisor?
A Suitability Standard financial advisor on the other hand doesn’t have to place their client’s interests first, but instead simply has to ensure that any investment that they recommend is suitable for their client. This is a perhaps subtle but fundamental difference.
Ensuring that an investment is suitable doesn’t mean that it’s necessarily the best choice for a client. So if a Suitability Standard advisor was considering two possible investments for a client, one of which might be better for the client, but if the other was still broadly suitable but was going to result in a higher commission for the advisor, then they would be perfectly able (and in fact likely) to recommend the latter.
In the USA the Suitability Standard is set by the Financial Industry Regulatory Authority (FINRA), and it simply requires that recommendations are consistent with the best interests of underlying customer requirements. It doesn’t require advisors to place their clients’ interests above their own, or above those of any investment firm that they may be recommending. While Suitability Standard financial advisors for expats are qualified and able to make investment recommendations, expats have no guaranty or certainty that the advice that they receive will be their best interests, rather than just broadly suitable for them.
Why should US expats choose a Fiduciary Financial Advisor?
The difficulty with suitability standard financial advisors is that they are stuck in the middle of competing interests, being the clients’ aims, and incentives offered by competing investment firms. This inevitably leads to compromise between these interests. While Suitability Standard financial advisors can be a cost effective option, the long term cost may not be worth the short term saving.
The EU doesn’t currently have a Fiduciary Standard equivalent, though it is consulting on the idea. In typically European fashion though, it is including environmental and social concerns alongside ethical ones as a possible basis for a code for European based financial advisors to have to follow.
In the UK meanwhile, financial advisors are just compelled by law to ‘treat customers fairly’.
We strongly recommend that American expats looking for a financial advisor reach out to an American Fiduciary Standard expat specialist financial advisor so that they can have confidence that their long-term interests are being best served.
Sincerely,
Tom Zachystal, CFA, CFP©
President
Individual Asset Management (IAM) Contact Us
