News out of Washington D.C. has heads spinning in the fiduciary adviser community these days, mine included. As it considered the Regulation Best Interest rules package, the Securities and Exchange Commission (SEC) changed one word, and, in my opinion, weakened the fiduciary standard for Registered Investment Advisers (RIAs).
At issue is the section that previously required advisers to seek to avoid conflicts of interest and make a full disclosure of all material conflicts of interest. In the new rules, the “and” becomes an “or,” effectively gutting the standard. Now, it appears that conflicts of interest can occur as long as they are disclosed to the client. Get ready for more fine print!
While SEC Chairman Jay Clayton was among the majority who voted to approve the rules package, one commissioner, Robert Jackson, was the voice of reason. In a statement after the vote, Jackson said, “Rather than requiring Wall Street to put investors first, today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice. Even worse, contrary to what Americans have heard for a generation, the Commission today concludes that investment advisers are not true fiduciaries.”
The reaction from leaders in the financial advisory community and consumer protection advocates was swift and resolute. Barbara Roper, who heads investor protection at the Consumer Federation of America, accused the SEC of making the definition of fiduciary meaningless, and others pointed to longstanding academic research that shows disclosure alone is not effective at protecting consumers from conflicted advice. According to Financial Planning online, the SEC responded with this statement: “Our fiduciary interpretation in no way weakens the existing fiduciary duty; rather, it reflects how the commission and its staff have applied and enforced the law in this area.”
It gets better. As a part of this rulemaking, the SEC also removed the word “fiduciary” from the mandated language that RIAs must use in the disclosure document provided to retail investors. RIAs will now be required, as part of Form CRS, to say: “When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means.” Previously, we had to say: “We are held to a fiduciary standard that covers our entire investment advisory relationship with you.”
Broker-dealers must also use similar language when describing their standard: “When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations we provide you. Here are some examples to help you understand what this means.” If it was difficult for consumers to distinguish the difference between fiduciary advisers before, I can’t imagine that this language will help clear anything up.
DOL Fiduciary Rule Also Dead
The Obama administration had sought to protect consumers through by proposing a “fiduciary rule” through the Department of Labor (DOL), in which advisers managing retirement accounts would be obligated to place their clients’ interests first. President Trump delayed implementation of the rule shortly after his election, and the Firth Circuit Court has now confirmed that the controversial rule is now dead. While, in my opinion, the DOL didn’t go far enough to protect consumers from conflicted advice, the rule itself and the controversy around it did help elevate to raise awareness of the need for fiduciary advice. Even the late John Bogle, founder of Vanguard, hoped that the idea of “putting clients second” would create enough public outrage to encourage change. We’ll see.
Nothing Changes for AMDG Financial
All of us at AMDG Financial have been committed to fiduciary ideals since I started the firm in 2002. We are a fee-only firm and do not sell financial products. We have aligned our business to the professional standards set by the Centre for Fiduciary Excellence, and recently renewed our certification (something we’ve done since 2007) by undergoing an annual voluntary audit by independent fiduciary experts to ensure we continue to adhere to the fiduciary best practices. Despite rule changes by the SEC, our fiduciary processes and commitment to our clients will not change.
If you are in the market for an adviser, prepare to be even more confused about whether the advisers you meet will act in your best interests at all times. Be prepared to read lengthy disclosure statements, and ask a lot of questions. To ensure your adviser will act as a fiduciary, ask if he or she will put it in writing, or sign the fiduciary pledge.
SEC commissioners will come and go, and I am thankful for the position that Commissioner Jackson took on the fiduciary issue. At AMDG Financial, we still believe in looking out for our clients’ best interests and avoiding conflicts of interest. Earning – and keeping – your trust is paramount, and we won’t have it any other way.