Some important changes are coming that will help define your relationship with your financial adviser — including whether he or she can still be called an “adviser.”
A set of new Securities and Exchange Commission rules to help Main Street investors was announced last week. As stated by SEC Chairman Jay Clayton in an open meeting on June 5, 2019, these new rules are “designed to enhance the quality and transparency of the financial professional-retail investor relationship.”
Let’s focus on one of them that affects the more than 102 million people who are served by 428,404 financial advisers (technically “registered representatives” or “brokers”) who work for 2,766 “broker-dealers.” That includes firms like Merrill Lynch and UBS, as well as Schwab and Fidelity, to name a few.
It’s called Regulation Best Interest, described in a 771-page SEC release (see https://www.sec.gov/rules/final/2019/34-86031.pdf). The length of the release will tell you that this is a complicated topic that took a lot of study and careful consideration by regulators. The review included focus groups and thousands of comment letters from the public and the industry (you can read them here: https://www.sec.gov/comments/s7-07-18/s70718.htm).
What’s important about this development, which was a very long time coming, is this: The SEC established a new standard of care for brokers (and dual registrants — these are broker-dealers who are also registered as investment advisers).
The new standard (called Best Interest) is more than the current “suitability” standard, but it is less than a “fiduciary” standard that applies to registered investment advisers.
The new standard applies when a broker is making a recommendation. Let me quote the language of the new rule:
“A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.”
What’s the bottom line? Your broker will be giving you more information about the services he or she provides, along with a new disclosure to clarify not only the services, but also the standard of care that applies to those services.
How will brokers satisfy this new standard of care? There are four new obligations: disclosure, care, conflict of interest, and compliance. The conflict-of-interest standard is most important from my perspective.
According to an SEC summary, that obligation is designed to:
“* Mitigate conflicts that create an incentive for the firm’s financial professionals to place their interest or the interests of the firm ahead of the retail customer’s interest.
“* Prevent material limitations on offerings, such as a limited product menu or offering only proprietary products, from causing the firm or its financial professional to place his or her interest or the interests of the firm ahead of the retail customer’s interest;
“* Eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.”
This is definitely a move in the right direction. We’ll start seeing changes a year from now (June 30, 2020), when the new standard goes into effect.
There is more. Next week, I’ll discuss the new disclosure document called Form CRS, which also was adopted June 5, 2019.
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