Suitability, Best Interest and Fiduciary Duty
By Bill Boersma
In the ongoing conversation regarding the standard of care owed to life insurance policy owners, I was recently conversing with someone who didn’t understand my take on this. As I often do, I decided to ask AI what it thought.
It did a good job laying out my position
Here’s a clean, practical breakdown of Suitability, Best Interest, and Fiduciary Duty – how they differ, who they apply to, and what they actually mean in real-world practice (including life insurance and securities).
1. Suitability Standard
What It Is
The lowest of the three standards.
The advisor/agent must ensure the recommendation is suitable based on the client’s financial situation and needs.
Key Characteristics
- The product must generally fit the client’s objectives and circumstances.
- The advisor does NOT need to recommend the best option.
- Conflicts of interest can exist and do not need to be eliminated, but typical disclosure rules apply.
- Common for insurance agents under traditional state insurance regs.
Practical Example
Recommending an IUL that “fits” the client’s stated goals, even if another IUL or a VUL or a low-cost alternative is objectively better or cheaper.
2. Best Interest Standard
What It Is
A higher standard than suitability but still not a fiduciary standard.
The recommendation must be in the client’s best interest, balancing costs, risks, benefits, and alternatives.
Key Characteristics
- Advisor must consider a range of products, not just the one they want to sell.
- Must document why the recommended option is best for the client.
- Conflicts of interest can still exist, but they must be mitigated or managed, not hidden.
- Required under:
- Regulation Best Interest (Reg BI) for broker-dealers.
- NAIC Best Interest model (adopted by many states) for annuities.
- NY Reg 187 for life insurance in New York.
In Reality
Still allows commissions, proprietary product shelves, and captive distribution.
It does not require the advisor to act as a fiduciary, only to show the process that led to the recommendation.
Practical Example
Recommending an IUL or annuity because it best fits the client’s needs after considering alternatives, cost, surrender charges, complexity, liquidity needs, and compensation structure.
3. Fiduciary Duty
What It Is
The highest standard.
The advisor must place the client’s interests ahead of their own, with loyalty, care, prudence, and full transparency.
Key Characteristics
- Must recommend the best available option, not just a suitable one.
- Must avoid or eliminate conflicts of interest when possible.
- Any unavoid able conflict must be fully disclosed and managed.
- Applies primarily to:
- Investment advisers (RIAs) under the Investment Advisers Act of 1940
- ERISA fiduciaries for retirement plans
In Reality
- Much less product-driven.
- Requires far more documentation and ongoing monitoring.
- Advisors must look at cost efficiency, product design, fees, and long-term outcomes.
Practical Example
An RIA comparing multiple solutions (taxable, qualified, institutional, insurance, or non-insurance) and choosing the option that produces the best likely long-term outcome, even if it pays them nothing.
How This Shows Up in Insurance Specifically
- Most states only require Suitability for life insurance.
- New York (Reg 187) requires Best Interest for life and annuities.
- Some states have adopted NAIC Best Interest for annuities only.
- Fiduciary duty does NOT apply to most insurance agents unless:
- They are dual-registered (RIA + insurance)
- They are advising on retirement assets under ERISA
Bottom Line
- Suitability: “This fits.”
- Best Interest: “This fits and appears better than the alternatives I considered.”
- Fiduciary: “This is the best overall option for you, and I must put you first.”
This example uses the exact types of fact patterns that regulators and expert witnesses argue about in real cases.
✅ Scenario Summary
Client: 45-year-old high-income professional
Goal: Long-term cash value accumulation to supplement retirement
Risk tolerance: Moderate–high
Time horizon: 20+ years
Needs: Max accumulation, cost efficiency, transparency, long-term performance
Qualified plans already maxed out
Product Options Available
- IUL: 10% cap, 0% floor, typical charges, illustrated at ~5.5–6.0% under AG49B
- Variable UL (VUL): Low-cost platform, institutionally priced investment options, expected long-term return ~7.5–8.5%, transparent underlying investment risk
Both fit the general need for permanent coverage and cash value growth.
🔹 The Recommendation: IUL
The agent recommends the IUL as a “safer accumulation tool” with downside protection.
❗ Why This Is Suitable
Under traditional suitability rules, the sale could pass because:
- The client wants permanent insurance ✔
- The client wants accumulation potential ✔
- The client appreciates the idea of a 0% floor ✔
- The client claims to have moderate risk tolerance ✔
- The IUL is not inherently inappropriate ✔
The product objectively fits the client’s general goals and risk profile.
So Suitability Standard = PASS.
This is exactly why most IUL sales clear compliance under basic suitability.
❗ Why This Is NOT Best Interest
Under Best Interest rules (Reg BI or NY Reg 187–style):
1. Failure to consider cost efficiency
The VUL platform includes:
- Low-cost index subaccounts
- Lower overall drag over 20+ years
- Higher long-term expected return
- No cap limiting upside over decades
The IUL cap (10%) mathematically reduces the client’s long-run outcome relative to equity exposure—especially over 20–30 years for a 45-year-old.
2. Failure to consider client’s true risk capacity
The client:
- Has a long time horizon
- Has high income stability
- Has higher risk capacity than risk aversion
These factors tilt the balance toward variable life over capped crediting.
3. Failure to demonstrate that the IUL’s limitations were outweighed by its benefits
The agent cannot justify why:
- Buying capped returns
- With higher long-term implicit option costs
- And path-dependency risks
is better for a 20+ year accumulation goal than direct market exposure.
4. Failure to document why alternatives were not chosen
Best interest requires:
- Evaluation of alternatives
- Consideration of costs, features, complexity
- Documentation that the recommendation is truly superior
No such process exists in this example.
Thus Best Interest Standard = FAIL.
❗ Why This Would Never Satisfy a Fiduciary Duty
A fiduciary advisor would be required to:
- Consider the client’s optimal long-term outcome
- Evaluate investment alternatives across the entire marketplace
- Analyze cost drag, expected return, and volatility
- Avoid conflicts (e.g., commissions)
And crucially:
For a 45-year-old with 20+ years to retirement,
the statistically superior long-term engine is diversified equity exposure (i.e., VUL), not capped option-budget subsidized IUL crediting.
Fiduciary red flags:
- A VUL with low institutional funds is objectively more efficient for long-term accumulation
- The cap eliminates upside that the client’s risk profile supports
- The IUL is chosen primarily because:
- The advisor is insurance-only
- The advisor receives higher compensation
- The client is not shown a full risk/return trade-off
A fiduciary must pick the option that leads to the highest probability of maximizing the client’s financial outcome, not the one that is easiest to sell.
Thus Fiduciary Standard = FAIL.
📌 In One Sentence
The IUL is “suitable” because it fits the client’s general goals, but it’s not “best interest” or “fiduciary” because a VUL clearly provides better long-term expected performance, lower drag, and a better match to the client’s time horizon and risk capacity.
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 616-456-1000.
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered InvestmentAdvisor.
OC Consulting Group and its affiliates are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.
