Right after the SEC issued its Advice Rule Proposals, I provided a somewhat hasty summary, after reading over the three Proposals twice. This is a deeper dive into the Proposal that relates to brokerage and broker-dealer reps, known as 34-83062. I doubt most of you will want to read all 407 pages, and many of you actually won’t want to read 15 or so pages of summary. But I think it might help to have an understanding of what the SEC is proposing—and also (revealed in the commentary) what they’re thinking, and what standards we might be facing on both sides of the fiduciary divide in the near future.
My biggest conclusion, after reading 34-83062 in much greater depth, is that the proposed standards for brokerage firms and broker-dealers are far from what they’re described; they are clearly NOT a “best interest” standard, and calling them that will certainly mislead consumers into thinking that sales agents are required to put their interests ahead of the sales agent’s and the firm’s, when in fact they are not.
As you’ll see, the Proposal mixes a lot of high-minded language about doing what’s best for the customer with specific standards that are no more high-minded than FINRA’s existing suitability rules. There’s a lot of talk about what brokers and sales agents “should” do, but the actual standard as written doesn’t actually require anything different from what is going on now, and brokers and sales agents are even (I find this astonishing) given a choice whether to avoid conflicts of interest or disclose them.
Imagine a broker sells a client an annuity with a fat commission. Here’s the standard that the SEC proposes to hold him to when retrospectively examining that recommendation. He must (page 44):
“(1) understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (2) have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks and rewards associated with the recommendation…” (emphasis added)
Doesn’t that sound like suitability? There are additional clarifications on page 57 which specifically compare this standard to ‘suitability,’ which (as I read it) means that the brokerage firm would simply need to have products with fatter commissions on the shelf, in order for the broker to justify this sale. The Proposal says that:
“it would be inconsistent with the Care Obligation for the broker-dealer to recommend the more expensive alternative for the customer, even if the broker-dealer had disclosed that the product was higher cost … as the higher cost of the security would not be justified by the security’s other characteristics in comparison to reasonably available alternatives… By treating cost associated with a recommendation as an important factor in this analysis, the Care Obligation would enhance a broker-dealer’s existing suitability obligations under the federal securities laws.”
On the very next page, even this mild caution seems to be invalidated:
“the best interest obligation would allow a broker-dealer to recommend products that may entail higher costs or risks for the retail customer, or that may result in greater compensation to the broker-dealer than other products, or that may be more expensive, provided that the broker-dealer complies with the specific Disclosure, Care, and Conflict of Interest Obligations.” (page 58)
The DOL Rule casts a big shadow over these recommendations; DOL’s formulations are discussed, compared and contrasted throughout the proposal. In one comparison, it appears that the SEC Proposal writers explicitly recognize that their version falls short of the true best interest standard in the DOL rule that now exists in limbo. On page 47-48 they say that they followed DOL’s lead, except that they replaced the DOL rule’s “making recommendations without regard to your own interests” to more lenient terminology, because
“we were concerned that inclusion of the “without regard to” language could be inappropriately construed to require a broker-dealer to eliminate all of its conflicts (i.e., require recommendations that are conflict free)…”
That seems pretty clear, doesn’t it? The SEC specifically does NOT want to require brokers and sales agents to provide conflict-free advice. How can that be reconciled with the “best interest” terminology?
The SEC staff went into this with its eyes open. On pages 17-18, the Proposal writers showed a clear understanding of the nature of the conflicts that are built into the brokerage model, and their potential for harm. The Proposal notes that the National Examination Program has ‘focused’ (not sure what this means, since they were not eliminated) on perverse incentives to sell“complex or structured products, variable annuities, higher yield securities, exchange traded funds and mutual fund share classes… with higher loads or distribution fees.” and goes on to say that “conflicts of interest, when not eliminated or properly mitigated and managed, are a leading indicator and cause of significant regulatory issues for individuals, firms and sometimes the entire market.
And on pages 20-21, they warn us against the very thing they are doing (creating a misleadingingly lofty label for lower standards): “Any confusion regarding the standards of conduct that apply may only enhance the potential for harm from broker-dealer conflicts of interest, as this confusion results in retail customers mistakenly relying on those recommendations as being in their ‘best interest.’”
The Proposal specifically endorses sales commissions on page 38: “In particular, we sought to preserve the ability of investors to pay for advice in the form of brokerage commissions.” A couple of sentences later, it states that some investors may prefer a commission-based relationship, and that “we also share concerns raised by commentators about retail customers losing access to advice they receive through recommendations from broker-dealers,” because, we are told, “not all such customers have the option to move to fee-based accounts.” Really? I would be very interested to see the research that shows that customers couldn’t be served by a financial planner who charges flat fixed fees or hourly compensation.
On page 49-50, the SEC Proposal writers once again articulate their high-minded goal. They say that their current wording:
“reflects what we believe is the underlying intent of [Dodd-Frank] Section 913: that a broker-dealer should not put its interests ahead of the retail customer’s interests when making a recommendation to a retail customer. In other words, the broker-dealer’s financial interest can and will inevitably exist, but these interests cannot be the predominant motivating factor behind the recommendation. Our proposed language makes this intention clear by stating a broker-dealer and its associated persons are not to put their interests ahead of the retail customer’s interests.”
Yet a few pages later (page 53-54) the Proposal reassures brokerage firms and sales agents that:
“Specifically, as further clarification, proposed Regulation Best Interest would not per se prohibit a broker-dealer from transactions involving conflicts of interest, such as the following:
- Charging commissions or other transaction-based fees;
- Receiving or providing differential compensation based on the product sold;
- Receiving third-party compensation;
- Recommending proprietary products, products of affiliates or a limited range of products;
- Recommending a security underwritten by the broker-dealer or a broker-dealer affiliate, including initial public offerings (“IPOs”);
- Recommending a transaction to be executed in a principal capacity;
- Recommending complex products;
- Allocating trades and research, including allocating investment opportunities (e.g., IPO allocations or proprietary research or advice) among different types of customers and between retail customers and the broker-dealer’s own account;
- Considering cost to the broker-dealer of effecting the transaction or strategy on behalf of the customer (for example, the effort or cost of buying or selling an illiquid security); or
- Accepting a retail customer’s order that is contrary to the broker-dealer’s recommendations.”
Further, the proposal baldly states that it is not intended to give consumers additional rights of action in the courts or in arbitration, meaning (the way I read it) that there are no additional legal safeguards to consumers. See page 42: “we do not believe proposed Regulation Best Interest would create any new private right of action or right of rescission, nor do we intend such a result.” Okay…
There’s a long discussion of what constitutes a “recommendation” (pages 73-78) that must be the SEC’s bow to broker-dealers’ demand for rules rather than principles. The highlight for me was when the SEC blessed transaction relationships:
“the best interest obligation would not, for example: (1) extend beyond a particular recommendation or generally require a broker-dealer to have a continuous duty to a retail customer or impose a duty to monitor the performance of the account…”
Two-hat selling
The writers seem to create a strange muddle surrounding the rules governing the infamous two-hat approach taken by dually-registered sales agents, who wear a derby hat when providing advice, and then switch to a hat with colorful feathers when they apply that advice to the sales of a product.
The following, on page 87, would seem to say that these persons would be held to a fiduciary duty.
“Regulation Best Interest and its specific obligations, including the Disclosure Obligation, Care Obligation, and Conflicts Obligations, would not apply to advice provided by a dual-registrant when acting in the capacity of an investment adviser, even if the person to whom the recommendation is made also has a brokerage relationship with the dual-registrant or even if the dual-registrant executes the transaction. Similarly, when an investment adviser provides advice, the rule would not apply to an affiliated broker-dealer or to a third-party broker-dealer with which a natural associated person of the investment advisers is associated if such broker-dealer executes the transaction in the capacity of a broker or dealer.
For example, in the case of a dual-registrant that provides advice with respect to an advisory account and subsequently executes the transaction, Regulation Best Interest would not apply to the advice and transaction because the firm acted in the capacity of a broker-dealer solely when executing the transaction and not when providing advice about a securities transaction. In this case, when the advice is provided in the capacity of an investment adviser, the firm would be required to comply with the obligations prescribed under an investment adviser’s fiduciary duty, as described in more detail in the Fiduciary Duty Interpretive Release.” (emphasis added)
That seems clear, and somewhat reassuring to fans of fiduciaries. But then what about this sentence on the next page?
“We also have held the view that a dual-registrant is an investment adviser solely with respect to those accounts for which it provides advice or receives compensation that subjects it to the Advisers Act.”
If the dual-registrant sells a variable annuity, and doesn’t receive ongoing fees for ongoing advice, then he or she is (as I read this) exempt from fiduciary duty, and subject to the more muddled “best interest” standard. The hat you’re wearing when you ultimately make the recommendations determines the standards you’ll be held to. I wonder if that means that somebody who sometimes recommends commission-based products, and sometimes manages assets under an AUM arrangement would be allowed to call him/herself an “advisor?” We are not told.
Disclosures
As noted in my first take on the rule, the SEC is proposing a 4-page disclosure document that would be given to every brokerage customer “prior to or at the time of [each] recommendation.” On page 97, it would “describe the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest associated with the recommendation.”
Page 98 of the Proposal provides some general guidelines as to what that would say:
(i) that the broker-dealer is acting in a broker-dealer capacity with respect to the recommendation;
(ii) fees and charges that apply to the retail customer’s transactions, holdings, and accounts; and
(iii) type and scope of services provided by the broker-dealer, including, for example, monitoring the performance of the retail customer’s account.”
Plus, mentioned later, those material conflicts of interest—plus any disclosures that have to be made as a matter of existing law.
Page 101 contains a number of what must have been surprises to the brokerage lobbyists. Here we are told that this disclosure should be no more than four pages long (i.e. readable for the average consumer) that brokers would no longer be able to refer to themselves as “advisors,” and that they must disclose whether they are registered with the SEC. (I think this may be the most beneficial page of the entire Proposal for fiduciary planners and advisors.)
Here’s the specific language. The proposal would:
(1) require broker-dealers and investment advisers to provide to retail investors a short (i.e., four page or equivalent limit if in electronic format) relationship summary (“Relationship Summary”);
(2) restrict broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using the term “adviser” or “advisor” in specified circumstances; and
(3) require broker-dealers and investment advisers, and their associated natural persons and supervised persons, respectively, to disclose, in retail investor communications, the firm’s registration status with the Commission and an associated natural person’s and/or supervised person’s relationship with the firm.”
The goal, we are told, is to reduce or minimize investor confusion, and one wishes that the rest of the Proposal had similar real-world impact. My guess is that most of the brokerage and sales industry’s lobbying firepower will be directed at eliminating page 101 in its entirety.
The Proposal tells us that dual-registrants should provide additional disclosures. From page 106:
“dual-registrants could disclose capacity through a variety of means, including, among others, written disclosure at the beginning of a relationship (e.g., in an account opening agreement or account disclosure) that clearly sets forth when the broker-dealer would act in a broker-dealer capacity and how it will provide notification of any changes in capacity (e.g., “All recommendations will be made in a broker-dealer capacity unless otherwise expressly stated at the time of the recommendation.” or “All recommendations regarding your brokerage account will be made in a broker-dealer capacity, and all recommendations regarding your advisory account will be in an advisory capacity. When we make a recommendation to you, we will expressly tell you which account we are discussing and the capacity in which we are acting.”)”
The general disclosure provision refers several times to “material conflicts of interest,” and this slippery term is finally defined on page 112, which helpfully clarifies that sales agents and BDs don’t have to disclose ALL conflicts. The definition of what should be disclosed is:
“conflicts associated with recommending: proprietary products, the products of affiliates, or limited range of products; one share class versus another share class of a mutual fund; securities underwritten by the firm or a broker-dealer affiliate; rollover or transfer of assets from one type of account to another (such as recommendations to rollover or transfer assets in an ERISA account to an IRA, when the recommendation involves a securities transaction); and allocation of investment opportunities among retail customers (e.g., IPO allocation).”
Finally, the disclosure must be clear and understandable. The SEC is clearly aware of the obfuscation tactics of sales agents in their sly burial of disclosures in fine print and legal jargon, and wants brokerage firms to avoid this behavior. From page 117:
“broker-dealers generally should apply plain English principles to written disclosures, including among other things, the use of short sentences and active voice, and avoidance of legal jargon, highly technical business terms or multiple negatives.”
Duty of Care
One frustrating aspect of the SEC Proposal is the tendency to repeat itself over and over and over again, here there and everywhere. The section on disclosure is followed by a section on duty of care which largely repeats what had been proposed earlier. But I thought it was interesting that the Proposal inserts, in this later restatement, a “know your customer” rule which almost exactly mirrors FINRA’s suitability standards. From page 144:
“The proposed rule would provide that the Customer Investment Profile includes, but is not limited to, the retail customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer, or a natural person who is an associated person of a broker or dealer in connection with a recommendation.”
Another phrase that is not repeated verbatim earlier in the Proposal has to do with compensation and investment expenses. From page 148:
“where, for example, a broker-dealer is choosing among identical securities available to the broker-dealer, it would be inconsistent with the Care Obligation to recommend the more expensive alternative for the customer. Similarly, we believe it would be inconsistent with the Care Obligation if the broker-dealer made the recommendation to a retail customer in order to: maximize the broker-dealer’s compensation (e.g., commissions or other fees); further the broker-dealer’s business relationships; satisfy firm sales quotas or other targets; or win a firm-sponsored sales contest.”
On the next page, this lofty ideal is weakened considerably:
“Nevertheless, this does not mean that a broker-dealer could not recommend the more remunerative of two reasonably available alternatives, if the broker-dealer determines the products are otherwise both in the best interest of—and there is no material difference between them from the perspective of—retail customer, in light of the retail customer’s investment profile.”
Page 160-161 offers a kind of summary of the duty of care, where the SEC Proposal writers seem to be trying to have it both ways, to say that, well, no, this is not a fiduciary duty or a duty of care that exists in the fiduciary obligation set, but it’s CONSISTENT with the duty of care under a fiduciary obligation, just more closely tailored to the BD world. I found this to be among the most offensive phrases in the entire report, because it suggests that a standard consistent with a high standard is kind of equivalent to that actual high standard:
“Although we are not proposing a fiduciary duty that includes a duty of care for broker-dealers, it is important to note that we believe that the proposed care obligation under Regulation Best Interest, in combination with existing broker-dealer obligations (such as best execution), is generally consistent with the underlying principles of… the duty of care enforced under the Advisers Act. We believe any differences in the articulation of these standards for broker-dealers, as compared to investment advisers, is appropriate given differences in the structure and characteristics of their relationships with retail customers, to preserve and incorporate existing guidance and interpretations related to broker-dealer suitability obligations, and to provide clarity to how Regulation Best Interest would change existing obligations.” (emphasis added)
Conflicts of Interest
Earlier I noted that the Proposal seems to give brokerage firms and sales agents a choice: they can either mitigate, or eliminate, or DISCLOSE conflicts of interest. This choice is very specifically laid out in the preamble to the Proposal’s discussion of conflicts of interest. From pages 166-167:
“These Conflict of Interest Obligations would require a broker-dealer entity to… establish, maintain, and enforce written policies and procedures reasonably designed to identify, and disclose, or eliminate, all material conflicts of interest that are associated with recommendations covered by Regulation Best Interest…” (emphasis added)
This is made even more explicit on pages 169-170:
“we do not intend to require broker-dealers to mitigate every material conflict of interest in order to satisfy their Conflict of Interest Obligations.”
These two phrases get right to the heart of the muddle. How can the SEC allow brokers to describe their standards as “best interest” when material conflicts of interest are specifically permitted, and when any loyalty to the customer can be disclosed away?
There’s some discussion about supervision and compliance at the firm level, and here again the SEC seems to bend awkwardly backwards to accommodate sales organizations, saying on page 171 that:
“We believe that it would be reasonable for broker-dealers to use a risk-based compliance and supervisory system to promote compliance with Regulation Best Interest, rather than conducting a detailed review of each recommendation of a securities transaction or security-related investment strategy to a retail customer.”
I wasn’t sure what a “risk-based” compliance regime meant, but footnote 295 (which gives you an idea of how many footnotes are scattered throughout the Proposal) helpfully tells us that this is basically a way to not upset the current broker-dealer compliance approach:
“We propose to interpret the term “risk-based” consistent with SRO rules so that broker-dealers can incorporate these new obligations into their current compliance infrastructure. According to FINRA, the term ‘risk-based’ describes the type of methodology a firm may use to identify and prioritize for review those areas that pose the greatest risk of potential securities law and self-regulatory organization (SRO) rule violations.. In this regard, a firm is not required to conduct detailed reviews of each transaction if the firm is using a reasonably designed risk-based review system that provides the firm with sufficient information to enable the firm to focus on the areas that pose the greatest numbers and risks of violation.” (emphasis added)
I take that to mean that the brokerage firm can still create incentives that prod its most ambitious sales agents to abuse clients and run away with big sales commissions, and then later claim, Oops! That was a rogue broker, and we had no idea what he was doing, but we’ve cut him loose (and pocketed the profits).
On pages 182-183, the SEC recommends, but does not require, broker-dealers to implement some changes in a lot of truly anti-consumer incentive structures:
- avoiding compensation thresholds that disproportionately increase compensation through incremental increases in sales;
- minimizing compensation incentives for employees to favor one type of product over another, proprietary or preferred provider products, or comparable products sold on a principal basis – for example, establishing differential compensation criteria based on neutral factors (e.g., the time and complexity of the work involved);
- eliminating compensation incentives within comparable product lines (e.g., one mutual fund over a comparable fund) by, for example, capping the credit that a registered representative may receive across comparable mutual funds or other comparable products across providers;
- implementing supervisory procedures to monitor recommendations that are: near compensation thresholds; near thresholds for firm recognition; involve higher compensating products, proprietary products or transactions in a principal capacity; or, involve the rollover or transfer of assets from one type of account to another (such as recommendations to rollover or transfer assets in an ERISA account to an IRA, when the recommendation involves a securities transaction)318 or from one product class to another;
- adjusting compensation for registered representatives who fail to adequately manage conflicts of interest; and
- limiting the types of retail customers to whom a product, transaction or strategy may be recommended (e.g., certain products with conflicts of interest associated with complex compensation structures).
Page 183 also recommends, but does not require, that broker-dealers eliminate things like “sales contests, trips, prizes and other similar bonuses that are based on sales of certain securities or accumulation of assets under management.”
Should Brokers Register with the SEC?
The Proposal briefly discusses the SEC’s controversial 2005 stance that broker-dealers should be allowed to offer “fee-based brokerage accounts… without being subject to the Advisers Act with respect to these accounts.” (p. 201) In 2007, the U.S. Court of Appeals for the District of Columbia Circuit ruled against this creative interpretation of the Adviser’s Act, and this Proposal asks the community to weigh in on whether brokers who manage assets on a discretionary basis should be required to register with the SEC:
“We believe that it is appropriate for the Commission to again consider the scope of the broker-dealer exclusion with regard to a broker-dealer’s exercise of investment discretion in light of both proposed Regulation Best Interest and the proposed Relationship Summary.” (p. 205)
Economic Analysis
The remainder of the Proposal is not a “proposal” at all, but an economic analysis of the impact of these rules on the constituency whose interests the SEC seems most interested in protecting: the sales organizations and the broker-dealers. It talks in general terms about the potential negative impact of recommending lower-cost or non-proprietary investments, but you have to question whether the authors have any idea what they’re talking about when they say, on pages 225-226 that of the 3,841 registered broker-dealers, only 366 are dually-registered.
The Proposal talks about average payout rates from 30% to 95% based on production, AUM-based fees ranging from 0.5% on larger accounts to 1.5% on smaller ones. It cites what a cynic might characterize as self-serving FINRA studies showing that the DOL Fiduciary Rule caused 53% of firms to eliminate or reduce access to brokerage advice services and 67% to migrate away from open choice to fee-based or limited brokerage services. This, we are told, greatly increased the costs to consumers:
“For those retail customers that migrated from brokerage to fee-based models, the average change in all-in fees increased by 141% from 46 basis points to 110 basis points.” (page 253)
Interesting, the SIFMA study also showed that 29% of the firms eliminated no-load funds from their menus altogether, and 67% reduced the number of funds available to their customers. Could that possibly have had anything to do with the increased costs? Oh, and the surveyed firms reported that the DOL Rule cost them an additional $600 million a year in compliance costs.
Anyway, this section of the Proposal estimates the costs of compliance with the new standard, which (remember) is really no different from the old one when it’s laid out in plain English. The proposed disclosure obligation, we are told, would impose an “initial aggregate burden” of 5,808,703 staff hours and an “initial aggregate cost” of $40.79 million. There would be an “ongoing aggregate burden” of 1,965,564 staff hours on broker-dealers. Do you wonder how they imagined they would able to estimate this so precisely, down to the hour? A footnote on page 283 offers a breakdown which assigns staff hours and costs to different aspects of the disclosure, but it looks like they were pulling numbers out of a hat. The end of the Proposal goes into even more depth, and looks, if anything, more arbitrary and less convincing.
The ongoing compliance and training proposals are estimated to cost the industry 131,320 hours and $24.84 million initially, and ongoing to cost 28,670 hours and $3.08 million a year.
Identifying material conflicts of interest would initially require 28,570 hours and $15.43 million, plus an ongoing burden of 28,570 hours. My initial thought reading this is that, for this aggregate fee, I would happily step in personally and show broker-dealers and brokerage firms where their material conflicts of interest are located, and write very clear disclosures that I think would help consumers understand the potential consequences of them. Call me.
Enforcing the policies would initially impose an estimated burden of 446,499 staff hours and $61.71 million. Ongoing: 435,071 hours and $61.71 million.
The report says that the Commission is unable to quantify the costs of not acting on conflicts of interest that brokerage firms currently act on.
On page 316, the Proposal kind of gives the game away, by noting that, despite the costs, this “best interest standard” could become a terrific sales tool for the sales industry:
“To the extent that retail customers perceive that the amelioration of the principal-agency conflict reinforces retail customers’ beliefs that broker-dealers will act in their best interest, retail customers’ demand for broker-dealer recommendations may increase.”
This is elaborated on three pages later in a VERY revealing passage:
“It may be the case… that certain retail customers base their choice between a broker-dealer and an investment adviser, at least in part, on their perception of the standards of conduct each owes to their customers. For example, there may be retail customers who prefer the commission structure of a broker-dealer, but who also prefer the fiduciary standard of conduct applicable to investment advisers… Because the proposed rule establishes a best interest standard of conduct that incorporates and goes beyond the current broker-dealer standard of conduct, broker-dealers may be better able to compete with investment advisers for those customers. To the extent that there are customers who prefer the commission structure of a broker-dealer, but who chose to use an investment adviser because of their fiduciary standard of conduct, we expect that the proposed rule will enhance competition between broker-dealers and investment advisers.” (emphasis added)
Bingo! The illusion of an enhanced standard of care, without any actual requirement that broker-dealers change their behavior, would be a boon to the brokerage industry’s ability to compete with those darned fiduciary advisors. This is what the sales industry has wanted all along, and they got it, and the SEC is acknowledging that they got it.
There is speculation that the higher regulatory costs—if you believe the numbers—might drive some broker-dealers out of business, and others may cut back on product lines that would no longer be profitable if a real “best interest” standard were imposed. There’s a more detailed breakdown of where the estimated costs of compliance and disclosure come from, but you become even more skeptical of the SEC’s illusion of precision as you read it.
Implications
The reader is invited to think of the implications of all this, but just like a huge disclosure document that obscures the real disclosures, the 407-page Proposal seems almost purposely designed not to be read and assessed with the actual consequences in mind.
After spending a weekend going through the entire proposal again, I believe that brokerage firms are going to weaponize the idea of “best interest” against the fiduciary advisory community.
Perhaps more dangerously, brokers and sales agents, who would be prevented from using the word “advisor” or “adviser” in their titles, will rebrand themselves into territory that fiduciaries have long staked out.
Meaning? “Financial planner” and “wealth manager” are unprotected under this Proposal. I can envision advertisements saying: “Talk to your Merrill Lynch financial planner about your future…” which would potentially encroach on decades of brand-building by the Financial Planning Association and everybody who holds a designation from the Certified Financial Planning Board of Standards & Practices.
So imagine a consumer is talking to a broker, and mentions that she just finished talking with a fee-only advisor down the street, who said he was an “advisor” and a “fiduciary,” which means he was obligated to put her interests ahead of his own.
“Yeah, they throw that ‘fiduciary’ term around a lot over there, but that’s because nobody understands what the heck it means,” says the broker. “I’m a financial planner. I’m held to a ‘best interest’ standard by the Securities and Exchange Commission. That means I have to look out for your best interests. Can I be any clearer about this?”
Then he sells her an annuity with a fat commission that is lower than the commissions on some of the other products on his brokerage firm’s shelf.
Meanwhile, there is also nothing in the proposals, nothing at all, which requires brokers to register with the SEC. Is this not a huge omission? If a brokerage firm refuses to register its brokers with the SEC, then the firm should be prohibited from telling the public that it offers financial advice—including financial planning and wealth management, which are widely understood to be vehicles for providing financial advice.
So when that broker tells the consumer that he’s required by the SEC to follow a best interest standard, the consumer should ask an innocent followup question: “Are you REGISTERED with the SEC? Why not?”
And:
Will you sign a fiduciary oath? Are you an advisor?
This Proposal gives the brokerage community a lot of new material to work with in its efforts to compete with people who treat their clients like they would their mother. But fiduciaries would still retain a few ways to fight back.