Instead of Regulation Best Interest, the new SEC proposal to replace the toppled Labor Department rule should be called Regulation BS.
The regulator is proposing a new “Customer Relationship Summary” to alleviate investor confusion — which, as a concept, isn’t a bad idea. Sadly, the Commission’s draft fails miserably as a consumer protection measure for the public and actually makes matters worse.
The SEC commentary notes that the advice brokerage reps are giving clients is nearly identical to that given by advisors, and therefore, the commission proposes to raise the standard for brokers from suitability to best interest. It offers its CRS to help clients understand the difference between brokerage account and advisory services.
So far, so good.
However, this approach is deeply flawed in several ways. First, brokers are not exempt from the Advisor Act unless the advice is “solely incidental to the conduct of its business as broker or dealer.” Non-incidental advice should be delivered through an advisory account, but the SEC simply has not done its job and enforced it. The law draws a bright line between advice and sales. If the SEC would enforce the law, the public would have the protections embodied in the Advisor Act and the fiduciary duty that goes with it.
Secondly, one of the most basic definitions of a fiduciary is, “a person obligated to act in another’s best interest.” The SEC’s Regulation BI rebrands the suitability standard by taking — nearly verbatim — the three main suitability obligations for firms and associated persons in Rule 2111 and simply replaces the word “suitability” with the fiduciary language “best interest.” Many other of the suggested statements in the CRS are misleading or flat-out false particularly for fee-only financial planners. For instance, “we have an incentive to advise you to invest in certain investments … because the manager or sponsor of those investments shares with us revenue it earns on those investments.”
Furthermore, the CRS document is too long and repeats disclosures and many of these are items not germane to the primary issue, which is, establishing the difference between brokerage and advisory relationships. For instance, “Other firms could provide advice on a wider range of choices, some of which may have lower costs.” That line would apply to both brokers and advisors so it does not aid in understanding a difference between the two.
By nature, disclosures have limited ability to help consumers. Regulations should reflect the simple principle that telling someone you may act against their interests does not excuse acting against them.
If disclosure is to have a chance of being effective, it has to be clear, concise and communicate how a client is affected.
So what would I suggest? The suggestions italicized below use language from the law or the SEC’s own words from various documents. Short sweet and to the point without getting bogged down in technical definitions of fiduciary and suitability.
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Fiduciary advocates lament the absence of the term from the SEC's rule, which they say fails to move beyond FINRA’s existing suitability standard, while the brokerage sector sees the proposal as a welcome jump in oversight.
June 15 -
Investment advisors and broker dealers have different “relationship models” with clients, the chairman says.
May 22 -
What should advisors expect from the upcoming regulation?
May 18
My streamlined CRS for advisory relationships:
We are an investment advisor and provide advisory accounts and services rather than brokerage accounts and services. “Advisory accounts and services” means we, for compensation, are engaged in the business of providing advice to others or issuing reports or analyses regarding securities. “Brokerage accounts and services” are transactional - for facilitating the buying and selling of securities and investment products. If you do not want or need advice about securities, a brokerage account would be more appropriate.
“Advice about securities” means:
1. advice about market trends;
2. advice about the selection and retention of other advisers;
3. advice about the advantages of investing in securities versus other types of investments (e.g., coins or real estate);
4. providing a selective list of securities even if no advice is provided as to any one security; and
5. asset allocation advice
As advisors, we are subject to a fiduciary standard that includes duty of loyalty to you, duty of care, duty to provide best interest advice, duty to seek best execution, duty to Act and to provide advice and often, duty to monitor over the course of the relationship.
Our Form ADV brochure can be read here (link to regulatory and/or advisor site). It includes important details about our practices, fees, other costs, conflicts of interests, how those conflicts are addressed, our disciplinary history, experience, credentials, how we choose investments, risks, and who you should contact about any issues that arise, among other things.
My streamlined CRS for brokerage relationships:
We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services. This means our primary role is facilitating the buying and selling of securities and investment products. We must have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer.
Advisory accounts and services are subject to fiduciary duties. These duties include duty of loyalty to you, duty of care, duty to provide best interest advice, duty to seek best execution, duty to Act and to provide advice and often, duty to monitor over the course of the relationship.
We are exempt from these fiduciary duties because any advice given is solely incidental to the conduct of our business as broker or dealer. If you wish to receive advice regarding any of the below, an advisory account is more appropriate.
1. advice about market trends;
2. advice about the selection and retention of other advisers;
3. advice about the advantages of investing in securities versus other types of investments (e.g., coins or real estate);
4. providing a selective list of securities or advice as to any one security; and
5. asset allocation advice
See our schedule of fees or the applicable product prospectus or offering documents for costs, risks, conflicts and other disclosures.
Lastly, I’ll leave you with this thought. What about dual registrants and hybrid firms that can wear either the brokerage or advisor hat? The best way, from a consumer protection, standpoint to address that is to ban hat switching entirely. Once a fiduciary, always a fiduciary. Everyone would need to choose to be either an advisor or a broker.
A ban is highly unlikely at this point, however, but if the Commission would enforce the law and use a CRS that clearly outlines the difference between brokerage and advisory services, it would be harder for damaging hat switching to occur. I have some hope this could happen. The Commission is at least proposing that people that are not registered at all refrain form using the title “financial advisor.” After all, it’s hard to argue advice is incidental when holding out as an advisor.
