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'Rubbish': Advisors, firms trade barbs over SEC's best interest rule

ByTobias Salinger, Andrew Welsch, Kerri Anne Renzulli, Sean Allocca, Jessica Mathews

August 14, 2018 3:38 PM

Industry insiders and the investing public are telling the SEC just what they think of the regulator's proposed Regulation Best Interest.

It's "rubbish," an advisor says.

And that is one of the less-heated responses.

Clashes over the Department of Labor's fiduciary rule have carried over into the debate on the SEC's proposal, also known as Reg BI, which the commission put forward earlier this year.

Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC), speaks during an SEC open meeting in Washington, D.C., U.S., on Wednesday, April 18, 2018. Clayton unveiled a new approach that will attempt to address legal and regulatory uncertainties that were largely triggered by the Labor Department's rules. Photographer: Yuri Gripas/Bloomberg

Several industry trade groups and firms threw their support behind the SEC's proposed regulation, but indicated areas where the commission should rethink its approach. Restricting titles, they said, would do little to reduce client confusion about the intricacies of the industry. LPL Financial suggested that such a proposal would "inevitably spawn a proliferation of new titles that would contribute equally to investor confusion."

Fiduciary advocates criticized the SEC proposal as ineffective policy at best, knocking it for its reliance on disclosure to protect investors.

Clients don't read complicated prospectuses, advisor Ethan Baird noted. What makes the SEC think complicated disclosure documents are the answer?

More than 3,800 investors, advisors, firms, advocacy groups and others filed comments to the commission, according to data posted on the SEC's website. With the comment period closed, the SEC will review the feedback and consider whether to make changes, if any, to the proposal before putting it to a vote before its commissioners.

Scroll through to see a sampling of the most provocative and thoughtful feedback the regulator received.

'Rubbish'

"By passing this proposed regulation, brokers will be able to act and look like fiduciaries and at the same time still be able to sling products for commissions. How is this in the best interest of a client? Investors do not read the complicated prospectuses and ppms provided to them by brokers selling products. Who in their right mind believes that by simply requiring brokers to give more disclosure (which will be complicated and not understood by most investors) they can still sell commission products and the sale can somehow be in the client's best interest? Rubbish. Pass this proposed regulation and you only harm the investing public."

Ethan S. Braid
President of HighPass Asset Management
Denver

Creating new problems?

Bloomberg News

"Although we appreciate the commission's general concerns regarding customer confusion as it relates to the role and level of services provided, we believe that restricting the use of 'advisor' or 'adviser' while allowing similar descriptors, such as 'financial consultant' or 'wealth manager,' would be unlikely to advance investor protection in the way the commission intends. Prohibiting specific titles would inevitably spawn a proliferation of new titles that would contribute equally to investor confusion."

Michelle Oroschakoff,
Chief Legal Officer, LPL Financial
San Diego

Preserve client choice

The Charles Schwab Corp. logo is displayed at an office in New York, U.S., on Friday, April 12, 2013. Charles Schwab Corp., is a financial services firm with $1.89 trillion in client assets. Photographer: Scott Eells/Bloomberg

Scott Eells/Bloomberg

"It is important for the commission's final rules to enhance investor protection while not diminishing the autonomy and choice for retail investors who maintain their accounts at dual registrant firms like Schwab or who hire independent RIAs to help them invest and manage their accounts."

Christopher Gilkerson, general counsel, and;
Tara Tune, corporate counsel
Charles Schwab

Save suitability

"A decision to replace the term 'suitable' in the text of traditional suitability rules with the phrase 'best interest' will disrupt the market, decrease competition, increase the price of services out of the reach of thousands of middle-class Americans, and significantly reduce consumer options for selecting valuable professional services."

Douglas Ommen
Iowa Insurance Commissioner

'Completely counterintuitive'

“You want on the one hand to keep getting a relatively decent yield from your investments, but also protect your portfolio against short-term bouts of volatility," said Maximilian Kunkel, chief investment officer for Germany at UBS Wealth Management.

A pedestrian shelters under an umbrella while passing a UBS Group AG bank branch in Zurich. Photographer: Stefan Wermuth/Bloomberg

Bloomberg News

"It will make for a puzzling and completely counterintuitive regulatory framework if (as under the Investment Advisers Act of 1940) an investment advisor who has a fiduciary relationship with the client is permitted to mitigate its conflicts by means of disclosure and client consent whereas a broker-dealer may not be allowed to do so. Requiring broker-dealers to mitigate or eliminate certain conflicts would subject broker-dealers to a higher standard than investment advisors who are permitted to handle conflicts through disclosure. Such a mismatch between the standards for broker-dealers and investment advisers is neither appropriate nor necessary."

Jason Chandler, co-head of investment platforms and solutions of UBS Global Wealth Management
Michael Crowl, general counsel of UBS Group Americas

'Grievous harm'

william-galvin-Massachusetts-regulator-bloomberg-news

William Galvin, Secretary of then Commonwealth of Massachusetts, speaks during a hearing of the House Financial Services Capital Markets Subcommittee on trading practices in the Mutual Fund industry in Washington, DC November 6, 2003. Photographer: Chris Kleponis/Bloomberg News.

Chris Kleponis/Bloomberg News

"The proposals address the most fundamental of investor protection issues: the duties that providers of investment advice owe their customers and clients. As a regulator, I have seen the grievous harm suffered by Main Street investors who mistakenly trusted and relied on conflicted investment advice. The commission now has the opportunity of a generation to protect them. Unfortunately, the proposals are inadequate to provide this protection."

William Galvin
Secretary of the commonwealth of Massachusetts

Common problem

"For financial professionals registered with both of these entities as a registered representative and an investment advisor representative, it is not clear how the title restrictions would apply. This scenario is not unique to Ladenburg and its subsidiaries; rather, this is a common scenario in the independent financial services industry."

Joseph Giovanniello
Senior vice president for corporate and regulatory affairs, Ladenburg Thalmann

'Misleading titles'

"We support the SEC's goal of ensuring that retail investors understand the kind of financial professional they are doing business with by restricting the use of potentially misleading titles. Most of FSI's member firms and financial professionals are dual registrants or dual-hatted professionals (i.e. those who are both registered representatives of a broker-dealer and investment advisor representatives). Our members hold themselves to a high standard as stewards of their clients trust and do not want unscrupulous actors to be able to present themselves as offering the same level of service without proper registration."

David Bellaire
General counsel, FSI

'Ineffective policy'

"I believe the commission's approach of trying to adjust the standard that applies to advice delivered by broker-dealers, through the implementation of Regulation Best Interest, is not only an ineffective policy approach that may amplify consumer confusion by using overlapping terminology to describe substantively different standards of care, but inappropriately broadens Congress' narrow broker-dealer exemption for 'solely incidental' advice."

Michael Kitces
Co-founder of XY Planning Network and partner of Pinnacle Advisory Group

Simple distinction

"Regulate the titles and marketing associated with financial planning and investment advice and limit the advisory based titles to fiduciary advisors only. Consumers are OK with commission transactions; car buying, house buying, etc. However, they know that those professionals are commissioned and in a sales role. We can keep the same simple distinction for true planning and advice vs. sales in our industry."

Jacob D. Kuebler
Owner of Bluestem Financial Advisors
Champaign, Illinois

'Not necessary'

"Ultimately, the proposed titling restrictions are not necessary — taking into consideration the other provisions of the proposal — to assure consumers understand who they are hiring, for what services, at what cost and under what legal standard of conduct. The disclosure items in the proposal go much further toward addressing consumer confusion and educating them about their rights, relationships, costs, etc., than the titling restrictions, which are not tied to consumers' understanding of these specific issues."

Keith Gillies
President, NAIFA

'Unreasonable burden'

"The complex, overlapping and costly structure of regulations that the DoL, the SEC, and the several states are creating imposes an unreasonable burden on the financial industry. The burden falls especially heavily on the small and independent businesses in that industry, who have few resources to devote to identifying, deciphering and complying with such regulations."

David Addington
General Counsel, National Federation of Independent Business

'The illusion of protection'

"Permitting a brokerage firm and its representatives to state that they act in the 'best interests' of their customers, when in fact their duties flow to the product manufacturer or issuer of the security (or to their own interests, when selling proprietary products or otherwise acting as a dealer), only permits falsehood. The commission's proposal, by stating that a broker-dealer acts in the 'best interests' of the customer, while utilizing a safe harbor and permitting the use of disclaimers by firms, in essence creates only the illusion of protection — i.e., the commission creates a fallacy."

Ron Rhoades
Director of the personal financial planning program at Western Kentucky University's Gordon Ford College of Business
Bowling Green, Kentucky

Prohibition

"Financial Engines supports prohibition on use of the terms 'adviser' and 'advisor' by broker-dealers to describe themselves when communicating with retail customers; however, Financial Engines believes that other terms, such as 'manager' or 'planner' are similarly problematic, and encourage the commission to also prohibit use of such terms."

Christopher Jones,
Chief investment officer of Financial Engines
Palo Alto, California

'Limited utility'

"The commission should carefully consider the limited utility of disclosure as a primary means of protecting retail investors and ensuring their 'best interests' as detailed in the proposal. As evidenced by a growing body of research, because of numerous behavioral biases and cognitive tendencies, disclosure has frequently not been as informative or useful in protecting retail investors."

Tom C.W. Lin
Professor at Temple University's Beasley School of Law
Philadelphia

One size doesn't fit all

"I would like to go on record to strongly encourage the SEC to not allow regulations that limit my ability to service my clients either in the product or payment area. One shoe does not fit everyone's foot. Diversity in product, service and compensation are good for the industry and ultimately for the client when used appropriately."

Richard D. Garton
Co-founder of Garton Pate Financial Advisors
Bluffton, Indiana

'I beg of you'

"I work with fee-only advisors across the country. I see the work they do and hear the horror stories they have of clients formerly served by non-fiduciary financial advisors. I beg of you to work to make a clear delineation between the commissioned side of the business and a true fee-only fiduciary.”

Arlene Moss
Coaching Program Manager at XY Planning Network
Colorado Springs, Colorado

A fiduciary must

Scott Wenger

"Based upon the real-world business experience of the more than 81,000 CFP professionals who are stakeholders and members of the coalition organizations, the coalition believes that any final rule based on this proposal must include robust and explicit fiduciary protections for retail investors, regardless of the business model under which that advice is provided. Without these critical safeguards, Reg BI not only will fail to increase protections for retail investors, but also may unintentionally mislead the public by implying that compliance with the final rule will cause financial firms and professionals to recommend only those investments that are truly in a retail investor's 'best interest.'"

Financial Planning Coalition:
Kevin Keller, CEO of CFP Board
Lauren Schadle, CEO of FPA
Geoffrey Brown, CEO of NAPFA

Cut down the 'legalese'

"I also encourage the SEC to develop a CRS template that my firm can use to help me create a useful and informative CRS that provides clients accurate and helpful information. To the extent the SEC creates a template form for firms to use, this will cut back on potential investor confusion and will keep firms and their legal counsels from adding too much legalese to the document, which would interfere with my ability to use the form to have a meaningful conversation with my client."

Travis A. Morrow
President of 3 Rivers Financial Group
Kennewick, Washington

A simpler proposal?

"I request that you consider eliminating the proposed legislation and simply require all broker-dealers to track revenue from advice (in whatever way it's paid), and require those whose advice revenue is greater than 25% of their total income to register as RIAs. Those that do not should not be allowed to provide advice and, more importantly, should not be allowed to use the term adviser or advisor in promoting themselves."

Artie Green
CFP and principal of RIA Cognizant Wealth Advisors
Palo Alto, California

Respect for differences

"BDs and IAs simply have different relationships with their clients, and, as such, investors have different expectations depending on whether they are working with a BD or an IA. The principles-based framework embodied in the proposals will help investors understand the differences between BDs and IAs, thereby enabling them to make informed decisions about the type of financial professional that would best meet their needs."

Catherine Weatherford
CEO of Insured Retirement Institute

Lessons from across the pond?

"As an industry, we should move to the education-based commission-free system put in place in the United Kingdom in 2013. The fiduciary standard should only be used by fee-only advisors that work to educate clients. It should not be used by commissioned salespeople that simply have too many conflicts of interest."

Bart Fox
CFP and owner of RIA Fox Custom Financial Planning
Greenwood, Indiana

'Statistically significant'

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Attendees check in at the 2018 Morningstar conference<br/>

"Flows into mutual funds paying unusually high excess loads declined after the DoL proposed its fiduciary rule in 2015, and this shift was statistically significant. This reduction in the distortionary effect of conflicted payments suggests that firms put in place effective policies and procedures to mitigate conflicts of interest in response to the DoL rule and, further, that the SEC's proposal could maintain this important momentum."

Aron Szapiro
Director of policy research, Morningstar

Consistent standards

(Bloomberg News)

Luke Sharrett/Bloomberg

"Both BDs and IAs play an important role in helping Americans manage their financial lives, as well as with accumulating and managing their retirement savings. Retail investors receiving investment advice should receive a consistent standard of care that is solely in their best interest, regardless of whether the advice comes from a BD or an IA."

David Certner
Legislative policy director at AARP

Investor confusion? Try advisor confused

"Even professionals cannot distinguish when a dually registered advisor is providing advice or is acting as a broker. According to your new proposal there’s no change on that and they can keep their 'advisor' title even though they may do most of their work as a broker."

Genti Cici,
CFP and founder of RIA StandUP Advisors
Owings Mills, Maryland

'Please don't pass this regulation'

"I have nothing against financial sales people, but please don't allow them to say something that isn't true. What is wrong with the suitability rule? Allow the true to be spoken, either we are truly acting in the best interest or we are providing a product that is suitable. Please don't pass this regulation which will cause more confusion to the public."

Amy Irvine
CFP and owner of Irvine Wealth Planning Strategies
Corning, NY