By Michael J. Searcy
There has always been a divide in the financial industry between those who embrace fiduciary duty and those who skirt around it. It is a divide that can be nearly impossible for consumers to recognize and understand, leaving them exposed to potential harm depending on whose hands they find themselves in.
Am I working with an actual advisor or a salesperson? Is this person legally required to put my interests ahead of their own or are they suggesting something that’s good enough because it earns them a nice commission?
The debate on how to best protect consumers has been going on for years and now, the Securities and Exchange Commission (SEC) has adopted a regulatory package that impacts the standards of conduct governing the behavior of broker-dealers and registered investment advisers (RIAs), the Regulation Best Interest: The Broker-Dealer Standard of Conduct, or Reg BI.
So, have we finally found the solution to protecting investors? We’re afraid not.
Rick Fleming, the SEC’s Investor Advocate stated, “The most worrisome aspect of Reg BI is that it will allow broker-dealers and their associated persons to market themselves as acting in the best interest of their customers. If Reg BI is not enforced rigorously enough to demand behavior that matches customers’ expectations, then customers will be harmed by the new standard.”
Using the term “best interest” is a step toward getting away from “suitability” language that has long been the standard for broker-dealers.
How Was Suitability Used? According to FINRA, firms and their associated persons “must have a reasonable basis to believe that a transaction or investment strategy involving securities that they recommend is suitable for the customer.” Some have compared “suitable” to “good enough.” But now the language used will be “best interest” which sounds better, but may not carry additional protection and could just add more confusion.
Some confusion lies in how heavily the term fiduciary has been marketed lately. Investors are aware of the concept and even use it as a guide when seeking advice. This new regulatory package could appear from the outside to impose fiduciary duty on broker-dealers, but its actual focus is more on conflicts of interest and consumers best interest. So, once again, investors may be back in the same boat of having to protect themselves rather than relying on a governing body to protect them.
Consider asking these questions of a potential advisor and have them sign their responses: Are you a fiduciary in all circumstances throughout our relationship? Do you have a written fiduciary standard? Do you receive additional compensation (that would indicate a conflict of interest) beyond what I pay you? Some credentials require fiduciary duty as well. Consider asking if they are members of The National Association of Personal Financial Advisors (NAPFA), or are credentialed as a Certified Financial Planner™(CFP®).
The ultimate decision on who to work with is yours, but being informed is an important step.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on September 19, 2019 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.