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Regulation Best Interest: One Size Fits None?

Those of you who work with AMDG Financial know that we are a fee-only, fiduciary investment advisory firm. When I started the firm in 2002, I knew that placing my clients’ interests ahead of my own would make it possible to always deal with them from a position of integrity and clarity. In 2007, I decided to take things one step further, by submitting to a voluntary audit of our firm’s practices to ensure they supported a fiduciary process. That year, AMDG Financial became one of the first 10 firms globally to receive a certificate of registration from the Centre for Fiduciary Excellence (CEFEX).

We take our role as fiduciaries seriously. In fact, each member of our advisory team has achieved the Accredited Investment Fiduciary (AIF®) certification. I have the Accredited Investment Fiduciary Analyst (AIFA®) certification, which qualifies me to perform fiduciary assessments like the one we receive each year from CEFEX.

 While certain types of advisory firms, such as ours, must follow a fiduciary standard, others, which sell financial products such as securities or insurance, are not required to meet the standard. And things just got more complicated.

 You may not have marked the day, but June 30, 2020 was a big one for financial practitioners across the country. It was the day the SEC’s Regulation Best Interest (Reg BI) took effect.

 Reg BI does not require you as an investor to do anything. It’s aimed at those of us offering you investment advice or recommendations. Here is an SEC excerpt:

 “[Reg BI is] designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.”

 At face value, this seems reasonable, if vague. Here’s more from the SEC (emphasis ours):

 “Individually and collectively, these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.”

 Still not crystal clear? In English, the intent is to ensure you (the “retail investor”) have enough information to decide whether a professional investment recommendation is best suited to your needs, essentially no matter who is offering it.

 That still seems logical enough. But let’s take a closer look at how investment advice “best suited” for you in theory may translate in practice.

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 “Apple and Orange” Advisory Differences

 In our mind, new regulations should either eliminate, or at least make it easier for investors like you to recognize two very different practices that still exist side by side in the financial industry:

  • “Full-time” fiduciary advisors offer a fiduciary level of care throughout their relationship with you.

  • “Best interest” recommendations can be one-off pieces of advice you may receive during point-in-time transactions.

 Despite its promising name, Reg BI may muddy what clarity had existed between these higher and lesser standards of care. By attempting to apply the same broad rules to both, Reg BI has the potential to discount the still-stark differences between them:

 A Reg BI Checklist for Fiduciary vs. Broker-Dealer Investment Recommendations

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Ideal Full-Time Fiduciary Advice

Typical Broker-Dealer Investment Advice

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Relationship

Your advisor’s sole, continuous duty is to advance your highest financial interests (even ahead of their own).

A broker, banker or insurance rep offers other core services, along with point-of-sale investment recommendations.

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Primary Role

Your advisor deeply understands and accounts for the details of your total wealth interests, and advises you accordingly, always in a fiduciary capacity.

A broker’s primary role is to transact trades; a banker custodies accounts; an insurance rep sells insurance. Incidental investment advice is secondary to these roles. Not all transactions are subject to fiduciary duty.

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Employment Status

As a fully independent Registered Investment Advisor (RIA) firm, your advisor’s only “boss” should be investor clients like you.

Employed by a bank, brokerage house or insurance agent, a broker-dealer’s, banker’s, or agent’s “boss” is their employer.

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Compensation

Your advisor’s compensation should preferably be fee-only, so their only financial incentives come from fees disclosed in-full to investor clients like you.

Commissioned or fee-basedintermediaries earn part or all of their keep from their employer or through other (often opaque) sales incentives. (some banks pay their representatives a salary instead of commission; but the bank may receive the commission or fee, if any.)

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Investment Plan

First, it’s essential to have a plan. It should be grounded in evidence over emotion, structured to manage all your investments in unity, and tailored to patiently capture expected returns according to your personal goals and risk tolerance.

Investment recommendations are more typically offered as a point-of-sale, add-on service. They are unlikely to be guided by your big-picture plans; coordinated with the rest of your assets; or personalized to advance your total wealth interests.

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Conflicts of Interest

Ideally, your advisor has minimized and disclosed any conflicts of interest by embracing all of the above best practices – not only because it’s required, but because it’s the right thing to do.

New regulations aimed at minimizing and disclosing conflicts of interest may have been tacked onto, rather than integrated into the company’s core role and mission.

 

AMDG Financial’s Take on Reg BI: Less Isn’t Always More

 How could one set of regulatory rules apply equally to both lesser and higher standards of care?

 In theory: Both groups should minimize their conflicts of interest and disclose any inherent conflicts they cannot eliminate.

 In reality: When is the last time you read a financial disclosure, and understood what it meant or asked probing questions until you did? For most of us, it’s been a while. As such, legal disclosures alone may fail to protect investors from falling for sales pitches in disguise.

 In practicality, this means:

  • Continued double standards: Suffice it to say, Reg BI leaves some large legal loopholes to be leveraged by those who wish to continue offering incidental investment advice.
  • Business as usual: “Best interest” recommendations may still end up tainted by unnecessary conflicts of interest (such as compensation models that don’t actually align with investors’ best interests) and/or an incomplete understanding of your greater financial goals.
  • More due diligence: You, the investor, must still sort out which side of the table an investment recommendation is coming from. Worse, the well-established terminology that used to help you distinguish fully fiduciary from merely suitable advice has been subsumed under the fuzzier, untested language of Reg BI.

 What Comes Next?

To say the least, we are underwhelmed by Reg BI – and we are not alone.

Jane Bryant Quinn, a veteran financial journalist, described the new landscape as follows (emphasis ours):

 “[Reg BI] creates fake fiduciaries. It’s a disaster for investors because now a salesperson can basically say, ‘I have your best interest at heart — I put your interest ahead of mine.’ They’re allowed to use exactly the same language that fiduciaries use but without actually being fiduciaries.”

 Fortunately, this tale of fiduciary peril is not yet over. We, and many others like us continue to press for legal, political, and industry reforms to cut through the confusion.

 We’ll continue to keep you posted on regulatory changes that affect you. In the meantime, we encourage you to use the table above as a handy checklist for determining when an investment recommendation is most likely to truly be in your highest financial interest … and when it is not.

 What additional questions can we address for you at this time? Please let us know.

Click here to view previous news releases from AMDG Financial.

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