- New SEC rules raised the standard of care required of brokers making investment recommendations to their clients didn't clear up the confusion about differences between registered investment advisors and brokers.
- The decades-long debate over what the duties and obligations of brokers and RIAs to their clients are and how they should be regulated rages on.
What is a suitable investment for someone? What is in an investor's best interest? What is the difference between a securities broker and a financial advisor? If you have no idea, you're not alone.
"There is still so much confusion with financial terms," said Ashley Guerra, chief compliance officer for registered investment advisor Gamble Jones Investment Counsel, ranked No. 12 on the CNBC FA 100 list of top financial advisors for 2019. "I don't see a lot more awareness of the issue among investors.
"I still have friends that call me their broker sometimes," she added.
Regulation Best Interest (Reg BI), the new rules passed by the SEC in September, may have raised the standard of care required of brokers making investment recommendations to their clients, but it didn't clear up the confusion about the differences between RIAs and brokers.
"This just muddies the water further and confuses consumers," said Guerra, whose firm manages $1.3 billion in client assets. "The standard is wishy-washy and unenforceable.
"If the SEC wanted to make things clearer, they should have just dropped the façade and called brokers salespeople."
The decades-long debate over what the duties and obligations of brokers and RIAs to their clients are and how they should be regulated rages on. For RIAs, the new rules have little direct impact. Like brokers, they will be required to file a Form CRS — short for "customer relationship summary" — but they remain regulated as fiduciaries under the 1940 Investment Advisors Act.
The form lays out the services that brokers and advisors will provide to clients, the fees and costs of those services, the conflicts of interest they may have, the standard of conduct by which they are regulated and whether the firm or advisor has a legal or disciplinary history. It's "more paperwork," said Guerra, though not particularly onerous.
"Reg BI is not a challenging compliance problem for RIAs, but it's a negative for them because it paints over the fiduciary idea," said Blaine Aikin, chairman of fiduciary consultant Fi360. "[Reg BI] further obscures the essential differences between fiduciary RIAs and brokers and makes it harder for consumers to determine who is a fiduciary and who is not."
The new rules did raise the standard of customer care that now applies to brokers. Formerly, brokers were required to recommend investments that were "suitable" for their clients — a fairly expansive concept that arguably gave them wide latitude to recommend products and strategies more on their own interests than their clients'. Reg BI now requires brokers "to act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer," the SEC explained in the summary of the rule.
It articulates four obligations of a broker:
- Disclosure of the terms of the relationship (Form CRS);
- Assessment of risks, rewards and costs associated with recommendations;
- Disclosure and mitigation of conflicts of interest such as compensation from proprietary products and payments from third parties such as mutual fund managers and annuity providers; and
- Development and maintenance of procedures to comply with Reg BI as a whole.
If the obligations are enforced vigorously, they represent a significant step up in oversight for the industry. "Reg BI raises the bar for brokers," said Aikin. "They put fiduciary principles in the rule but it doesn't rise to the full fiduciary standard."
Therein lies the biggest rub, for RIAs, with the new regulation. It looks and smells like a fiduciary standard, but it isn't. "We're all competing for business and our selling point is that we're fiduciaries," said Guerra. "[The brokers] are trying to say they're in the same boat."
In its lawsuit to vacate Reg BI, RIA XY Planning Network argues that the ambiguity of the rule puts it at a competitive disadvantage to brokers in the marketplace.
"The irony of this is that people have a heightened awareness of the fiduciary issue but it's now more difficult to explain the differences between brokers and advisors," said Evelyn Zohlen, head of RIA Inspired Financial and current president of the Financial Planning Association. "More people know to ask if a [wealth manager] is putting their best interests first and with this rule everyone can now say yes."
The FPA supported a uniform standard of care for advisors and brokers but has yet to weigh in on the issue or on the two lawsuits filed to quash it. "It's not an issue of whether our members are impacted by the new rule but how we respond to it," said Zohlen. "We expect to make some announcements shortly."
Reg BI represents progress towards a higher standard of care for securities brokers, but it may be an interim step on the way to full fiduciary obligations for anyone offering personalized investment advice — particularly if the Democrats retake the White House next year. "We've been escalating in fits and starts to higher standards of care," said Aikin. "Firms recognize it's inevitable."
His big disappointment is that the SEC didn't go the full fiduciary distance now and thereby elevate the advisory industry to a more professional status. "People have very low opinions of financial advisors," said Aikin. "We have to improve our reputation.
"Like doctors and lawyers, advisors have to put their client's interests first," he added. "Those in the advice profession see this as another lost opportunity to advance the profession."