Is all investment advice equal? Seems like an easy question to answer, right? We assume that someone who is providing financial advice knows what they’re talking about. Problem is that isn’t always the case.
In fact, there is no educational requirement for those who provide financial services. So, it falls on investors to know what to look for in a financial advisor.
There is a term used since the ‘40s to describe the highest standard investors should expect of financial advisers – it’s called fiduciary advice. This means that the advisor will put their client’s interests first, that they will understand all aspects of the client’s wealth plan, and they won’t profit financially at the client’s expense.
Why Fiduciary Advice Matters
Having a fiduciary duty to clients puts financial advisors on similar footing with other professional consultants, such as physicians and attorneys. Hiring a fiduciary advisor just makes sense – but knowing how to tell the difference between a fiduciary and a nonfiduciary can be tricky. The obvious place to start is to check with your investment firm. If they are a fiduciary, it will probably be noted on their website. Additionally, a full-time fiduciary advisor will not have ties to a broker-dealer.
Unfortunately, it has probably become harder instead of easier for you to know when you are receiving this level of care, and just as significantly when you are not. As Phyllis Borzi, former Department of Labor EBSA head, stated, “Everybody claims to be a trusted advisor when some are really only salespeople.”
A recent Securities and Exchange Commission (SEC) overhaul has downplayed rather than strengthened the significance of hiring a fiduciary advisor by overlaying it with a new industry standard, called “Regulation Best Interest.”
On June 30th, 2020, the Securities and Exchange Commission (SEC) established the Regulation Best Interest (Reg BI).
According to the SEC, Reg BI was “designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.”
At face value, this seems reasonable but vague.
The SEC goes on to state, “Individually and collectively, these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.”
Still not crystal clear? In English, the goal is to ensure that consumers have enough information to make informed decisions about investment recommendations no matter who is offering them.
That still seems logical enough. But how does investment advice “best suited” for you translate in practice?
It seems that new regulations should either eliminate or at least make it easier for investors to recognize two very different practices that still exist side by side in the financial industry:
- “Full-time” fiduciary advisors offer a fiduciary level of care throughout their relationship with you.
- “Best interest” recommendations can be one-off pieces of advice you may receive during point-in-time transactions.
Despite its promising name, Reg BI may muddy what clarity had existed between these higher and lesser standards of care. By attempting to apply the same broad rules to both, Reg BI has the potential to discount the still-stark differences between them.
This chart provides a few key differences:
Fiduciary vs. Broker-Dealer Investment Recommendations
Ideal Full-Time Fiduciary Advice
Typical Broker-Dealer Investment Advice
A fiduciary advisor will work for your financial interests over their own.
A broker, banker, or insurance rep may offer other services along with point-of-sale investment recommendations.
Your advisor understands the details of your total wealth interests and advises you accordingly, always in a fiduciary capacity.
A broker’s primary role is to transact trades; a banker custodies accounts; an insurance rep sells insurance. Incidental investment advice is secondary to these roles. Not all transactions are subject to fiduciary duty.
Fiduciary advisor’s compensation should preferably be fee-only, so their only financial incentives come from investor clients like you.
Commissioned or fee-based advisors earn part or all of their income from their employer or through other sales incentives.
First, it’s essential to have a plan. It should be evidence-based, structured to manage all your investments in unity, and tailored to patiently capture expected returns according to your personal goals and risk tolerance.
Investment recommendations are typically offered as a point-of-sale, add-on service. They are unlikely to be guided by your big-picture plans, coordinated with the rest of your assets, or personalized to advance your total wealth interests.
A fully independent Registered Investment Advisory firm (RIA) provides full-time fiduciary duty.
Broker-dealers, banks, and insurance agencies tend to focus on transactions, and not all transactions are subject to fiduciary duty.
Less Isn’t Always More
How can one set of regulatory rules apply equally to both lesser and higher standards of care?
Theoretically, both groups should minimize their conflicts of interest and disclose any conflicts they cannot eliminate. Honestly, though, when is the last time you read a financial disclosure and understood what it meant or asked questions until you did? For most of us, it’s been a while. So, legal disclosures alone may fail to protect investors from falling for a sales pitch in disguise.
Suffice it to say, Reg BI leaves some large legal loopholes to be leveraged by those who wish to continue offering incidental investment advice. Even if a broker-dealer is trying to recommend sound investments, most likely, they aren’t aware of the big-picture goals you have in your wealth plan. Ultimately, investors must still sort out which side of the table an investment recommendation is coming from.
Jane Bryant Quinn, a veteran financial journalist, described the new landscape as follows:
“[Reg BI] creates fake fiduciaries. It’s a disaster for investors because now a salesperson can basically say, ‘I have your best interest at heart — I put your interest ahead of mine.’ They’re allowed to use exactly the same language that fiduciaries use but without actually being fiduciaries.”
Here is one more take from Nerd’s Eye View financial thought leader Michael Kitces:
“In issuing the new Regulation Best Interest rules, the SEC declined to equalize the standard of care for broker-dealer-delivered versus RIA-delivered advice as mandated by Dodd-Frank, and instead expanded the broker-dealer exemption that would allow broker-dealers to even more easily provide comprehensive financial planning advice without being subject to a fiduciary standard for that advice … which creates, literally, a double-standard for the delivery of financial planning advice.”
Fortunately for investors, industry reforms continue. In the meantime, your financial advisor can answer any questions you might have about Reg BI and what it means to your financial strategy.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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