SEC Drops the Ball on “Regulation Best Interest”

Advisers working for registered investment advisory firms like mine have long been held to a higher standard of care for clients than those that work for brokerage firms, banks and insurance companies and are paid by commissions. I am proud of the higher standard and have had it written explicitly into my client agreements for years on all client accounts, not just retirement plans or retirement accounts.

After the Fiduciary Rule put out by the DOL a few years ago that applied only to retirement accounts was struck down in court, the SEC had a chance to do what Dodd-Frank instructed it to do nearly 10 years ago – investigate conflicts of interest and their costs and come up with a better set of requirements to protect clients. You may know that the DOL rule was really crafted because the SEC failed to put anything together within a reasonable time.

So now the SEC is finally out with its best interest rule. Alas, “Regulation Best Interest” requiring compliance by June 2020, is a weak effort, ground down by continued intense pressure from brokerage and insurance firms (hopefully, you learned a long time ago not to be fooled by the titles of legislation and regulations).

Brokerage firms will have to shelve the sales contests that have been a staple for so long and can no longer require their brokers to sell only the firm’s proprietary products. And, they must provide clients with a “relationship description” including conflicts of interest. But, I’ll tell you in advance what that will look like – another boring disclosure document that the client won’t read – “Just sign here.”

And, while the SEC proudly announced that all advisers will have to put the client’s interests ahead of their own, it then proceeded to essentially say that if the financial person sells products for commissions and only incidentally provides investment advice, they are not advisers and are not held to the best interest standard. There’s the loophole through which you can drive just about the whole commissioned financial services industry. Victory! for Wall St. and the insurance industry, or so it is said.

Ask yourself why it is so hard for many of the big financial companies to agree to act in the clients’ best interest. Then ask yourself why aside from lots of expensive advertising and mainly intelligent and winsome salespeople anyone would choose to deal with them instead of an independent investment adviser that does put client interests first, not only because it is the law for registered investment advisers, but because most of us believe it is the right way to do business.

It’s a shame the SEC, who had the mandate and the ability, caved again to money and power and fell short of the protection it could and should have given investors.

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