Did you know that people calling themselves financial advisors are not all legally required to act in your best interest? The representative at the bank, the stockbroker, the insurance agent, the broker-dealer representative, the credit union advisor … none of these people are required to put your interests above their own, or of the company for which they work. This has been a problem for a very long time.
A few years ago, the Department of Labor passed a law which would have required all financial advisors providing advice related to IRS qualified retirement plans to act in a fiduciary capacity. A fiduciary, as you may recall, is required to act solely in the best interests of the client. The law was relatively quickly struck down by a federal court and was never fully enacted.
Last week, the Securities and Exchange Commission (SEC) passed 3-1, on a party line vote, a new rule (called “Reg BI”) that further complicates the regulatory environment and will leave consumers, and likely advisors who serve them, further confused. The SEC was attempting to address the relationship that stockbrokers have with their clients. Under prior rules, stockbrokers were required to recommend financial products that were “suitable”, based on the customer’s circumstances (e.g., age, income, goals, risk tolerance, etc.). This is a low bar and it often resulted in customers of the big wirehouses being sold products that, while “suitable,” were not in their best interests.
The SEC’s new rule prohibits brokers from putting their interests above those of their clients. While this may seem like an improvement over the “suitability” standard, it fails to require brokers to act in a fiduciary capacity with their clients. Broker-dealers must adopt written policies and procedures “reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest.” Broker-dealers will no longer be able to have sales contests, quotas or bonuses or non-cash compensation based on the sale of specific securities in a limited period of time.
To further confuse matters, the SEC provided a new interpretation of the fiduciary duty standard which has applied to investment advisors (like Springwater Wealth Management) that are regulated by the Investment Advisers Act of 1940. The SEC has indicated that investment advisors must disclose conflicts of interests, but not avoid them. It said that investment advisors have a duty of care and a duty of loyalty. The rule does not include language requiring investment advisors to put client interests first.
There is long-standing federal law that governs IRS-qualified retirement plans. ERISA (the Employee Retirement Income Security Act) was passed in 1974 and requires advisors to these plans to act in a fiduciary capacity. This law protects participants and their beneficiaries from untoward conduct.
So, the landscape for consumers of financial products and services is murky.
What can you do to protect yourself? Work with a Certified Financial PlannerTM professional. Beginning October 1, 2019, the CFP Board requires in its updated “Codes and Standards” that all advisors holding the CFP® credential act in the best interests of their clients. If your advisor is a CFP® professional, he/she must act in your best interests.
Sources: The New York Times, The Wall Street Journal, Department of Labor, CFP Board