Earlier this month the SEC approved new, long awaited regulations on investment advisors and brokers and how they work with their clients. While there has been a major push by investors and many investment advisors for a fiduciary standard for all advisors, the new SEC rules further confuse the differences between salespersons and fiduciary advisors. As one of the four SEC commissioners commented, “Rather than requiring Wall Street to put investors first, today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice.” See commissioner Jackson’s full comments on the new rules.

What’s the Difference?

Financial advisors fall under two different regulatory structures. According to the SEC, about 88% of advisors are licensed through FINRA which allows them to receive commissions on the sales of securities. These salespeople clearly have serious conflicts of interest with their clients and the SEC has allowed them to operate by disclosing their conflicts, often in multi-page documents filled with legalese and rarely read or understood by investors.

The other 12% of advisors are regulated solely by the SEC as Registered Investment Advisors and they have owed their clients a fiduciary duty. These “fee only” advisors charge clearly defined fees for their services and can’t receive commissions, so it is generally very easy for them to put their client’s interests first as they are the only ones that pay them.

Much of the confusion over the past thirty years arises from advisors that are registered with both FINRA and the SEC. In fact, the SEC says 61% of advisors are now registered as both. These “hybrid” advisors need to be fiduciaries sometimes, but often “switch hats” to work as salespeople and earn commissions. Investors simply don’t know which hat they are wearing at any given time.

The conflicted advice costs investors billions and it is clear why Wall Street has fought so hard against the fiduciary standard.  According to a 2015 White House study titled The Effects of Conflicted Advice on Retirement Savings, “the aggregate annual cost of conflicted advice is about $17 billion each year” just for retirement accounts.

History

For years, the SEC has been reluctant to protect investors by clearly delineating between salespeople and fiduciary advisors. Wall Street lobbying and politics have impeded the investor advocates and the segment of advisors that want to be regulated as trusted professionals. With the SEC’s neglect, the Department of Labor decided to use its authority over retirement accounts to require advisors to act as fiduciaries when advising on retirement accounts including IRAs. They initially proposed a rule back in 2010 and finally passed it in 2016 to take full effect at the beginning of 2018. Unfortunately, with the 2016 election changing the political landscape in Washington, the rule was effectively killed.

What’s Next?

The new SEC regulations will require a new disclosure form for all advisors to use with their clients and prospective clients. This new document, that may be up to four pages long, has been criticized as ineffective as retail clients generally don’t read or understand the current myriad of disclosure documents that they are faced with as investors.

Another of the new regulations is called Best Interests and calls on advisors to put their client’s best interests first. Unfortunately, it does little to require that or even improve on the current rules for advisors to recommend only investments that are “suitable” for their clients.

The latest regulatory changes even reduce the long held fiduciary obligation of Registered Investment Advisors. This change was simply another win for Wall Street against the fiduciary advisors that have been taking a larger and larger share of the market as investors learn more about their advisor’s incentives.

Still Fighting

A few states, fed up with Washington’s pro-Wall Street stance, have taken up the idea of requiring advisors in their state to act as fiduciaries. While it’s admirable to try this, the result could be a confusing mess of regulation akin to today’s marijuana laws.

One of the big proponents of the DOL’s Fiduciary Rule was the Financial Planning Coalition made up of the Certified Financial Planner Board, the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA). Vintage’s Frank Moore was chairman of NAPFA and served on the Coalition board during 2015-16 as the DOL Rule was created. The CFP Board continues to fight to promote a fiduciary standard and is pressing ahead with changes next year to hold CFPs to a higher standard.

What’s an Investor to do?

With the now codified confusion around advisors continuing, investors will need to do even more research on their advisors. One new change is that the 27% of financial advisors that are only registered salespeople through FINRA and not dually registered with the SEC, can no longer call themselves “advisors”. That may help a bit but there are so many different titles that they’ll likely come up with something equally misleading.

Investors can still seek out “Fee Only” Registered Investment Advisory (RIA) firms with some confidence. And CFPs will become a safer bet as their fiduciary standards are raised in the coming months. Members of NAPFA, the National Association of Personal Financial Advisors, are also held to a fiduciary standard. One of the best ways to determine your advisor’s incentives is to simply ask, “Will you always act as a fiduciary in working with me?” And then have them put it in writing.  Unfortunately, despite the new regulations, about nine out of ten financial advisors probably won’t do that.