By Michael Joyce
Regulating the standard to which broker/dealers and investment advisors are held has proven to be a bit of a sticky wicket for both the Obama and Trump administrations. While many registered investment advisors supported the implementation of the stricter Department of Labor fiduciary rule that died on the vine after the change in administrations, regulation that puts protections in place for financial consumers like what is currently proposed by the Securities and Exchange Commission should certainly be viewed as progress.
The regulation’s fate may not be decided until early 2019, after the SEC has had ample time to review the input. One can only hope that investor protections will increase and will be enforceable.
Over the past four decades, as the burden of ensuring the stability of investments and retirement savings has shifted from employers to employees, financial consumers have grown increasingly dependent upon the advice of their b/ds and investment advisors. Consequently, the need for regulation over how these entities behave and represent themselves to financial consumers has grown over time.
In its introduction to their proposed interpretation and regulation, the SEC states: “Broker/dealers and investment [advisors] have different types of relationships with their customers and clients and have different models for providing advice, which provide investors with choice about the levels and types of advice they receive and how they pay for the services that they receive.”
Requiring both b/ds and investment advisors to adhere to the same “best interest standard” for retail customers is a great place to start. Until now, b/ds have only had to meet the less stringent “suitability standard,” requiring they make suitable recommendations to clients. For more than 25 years as a registered investment advisor, I have witnessed first-hand how being required to meet the “best interest standard” benefits clients. Broker/dealer clients deserve the same safeguards.
Another component of the SEC’s proposed regulation is that b/d, investment advisors and RIAs will be required to provide retail investors a “relationship summary” to include the following:
- Information about the relationships and services the firm offers.
- The standard of conduct and the fees and costs associated with those services.
- Specified conflicts of interest.
- Whether the firm and its financial professionals currently have reportable legal or disciplinary events.
For many years, wirehouse brokers have used slick marketing campaigns to disguise the difference between themselves and RIAs. They want to appear as if they act in the best interest of clients without actually being held to a fiduciary standard. Many have questioned whether b/ds or hybrids should even be permitted to use the term “advisor” at all. Some in the b/d community have argued that they should be allowed to use the term “advisor,” but that the term “adviser” should be reserved for RIAs, since the Investment Advisers Act of 1940 that defined registered investment advisers refers to them as such. This minute difference in spelling (but significant difference in meaning) would undoubtedly confuse financial consumers, so b/ds should be prohibited from using either term. They should not be allowed to have their cake and eat it too.
With regard to conflicts of interest, specifically, the SEC, in fact, does not prohibit much—but it does insist that conflicts be clearly communicated to customers and clients so that they can make their own fully informed decisions about whether or not to invest in a certain product or with a certain individual or firm. The DOL rule would have required in certain situations that financial consumers sign documentation stating explicitly that they understood their b/d or FA’s role, conflicts of interest and compensation model. But the SEC proposed interpretation and regulation has no such requirement. Skeptically speaking, concerns abound as to how disclosures of conflicts of interest can and will be enforced. Obfuscation is certainly not outside the realm of possibilities.
Michael Joyce, is the founder and president of Agili, a registered investment advisory in Bethlehem, Pa. and Richmond, Va. He’s responsible for overall investment strategy, management of investment portfolios and financial counseling services. He can be reached at [email protected].