Ethical standards for financial advisors


If you work with a financial advisor, you depend on their expertise to handle your finances appropriately. After all, they are supposed to be the experts.

It is distressing if you find that your financial advisor made misrepresentations about the risk or character of the investments or sold investments that were not suitable for your circumstances. These actions may violate a financial advisor’s ethical duties, which could significantly impact your portfolio.

The two standards financial professionals must follow

Your financial advisor may have to adhere to the “suitability standard.” FINRA governs financial advisors who sell financial assets, including insurance, annuities and mutual funds. When financial advisors make a recommendation to buy, sell or hold a security or an investment strategy, that recommendation must be suitable based upon the clients’ investment profile including the client’s age, other investments, income, objectives, experience, time, risk tolerance and more.

Financial advisors bound by the suitability standard can recommend securities that pay a commission or bonus to the Financial Advisor, as long as these incentives are fully disclosed, and the securities are in the best interest of the client and suitable for the client’s needs.

Other financial professionals have to follow the “fiduciary standard.” Under the fiduciary standard, financial advisors have a fiduciary obligation to their client.

Generally, registered investment advisors are bound by the fiduciary standard and broker-dealers are bound by the suitability standard. However, if the broker dealer exercises discretion over your account, then the broker-dealer is held to a fiduciary standard.

If you believe your FINRA- and/or SEC-regulated financial advisor breached their fiduciary duties, you will want to make sure you understand your rights and options for relief.