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Advice Industry Casts Big Doubts Over SEC’s Best Interest Standard

April 23, 2018

The SEC’s “Regulation Best Interest” proposal last week is getting a lukewarm welcome from the financial advice industry. While the commission’s current proposal, which has been months in the making, is seen as a step in the right direction by many, some critics say it has not gone far enough and others believe it fails to achieve its objectives.

Industry analysts such as Cowen’s Jaret Seiberg see the SEC’s proposal mostly as a positive for broker-dealers when compared to the Department of Labor’s fiduciary rule, according to Bloomberg. The DOL’s rule applies only to retirement account advisors, purportedly forcing them to put clients’ interests first, and went into only partial effect last summer. But an appeals court vacated the rule last month, and the DOL has said that it will not enforce the rule, pending further review. Some analysts believe the DOL will now formally withdraw its rule when the SEC version is finalized, according to Bloomberg. Capital Alpha’s Charles Gabriel believes the SEC will take several months to reflect on the rule before taking the next step, the news service writes.

Many critics say the SEC didn’t go far enough to protect investors. Barbara Roper, director of investor protection at the Consumer Federation of America, has said it’s more accurate to call the rule “enhanced suitability,” while SEC Commissioner Hester Peirce says it’s more like “suitability plus,” as reported. Commissioner Kara Stein was even more critical, saying the SEC’s proposal only “maintains the status quo.”

Duane Thompson, senior policy analyst at Fi360, says Stein was correct to say the SEC “squandered” its chance to work in the best interests of investors, according to ThinkAdvisor. Massachusetts Securities Regulator William Galvin, meanwhile, says the SEC’s proposal “appears to be drafted to appease the broker-dealer industry and their lobbyists, protecting the industry’s best interests instead of the best interests of investors,” according to the publication.

Ron Carson, founder and CEO of the Carson Group, says the commission made a step in the right direction but should take it further and make all investment advice professionals act as fiduciaries, according to InvestmentNews. Jim Dowd, the founder and CEO of North Capital Private Securities, says he wished the SEC had gone further too, but says any clarity as far as what brokers can call themselves is “a good thing,” the publication writes. Others, such as Glenn Wiggle, a managing partner of Peak Brokerage Services, think the SEC’s attempt to restrict who can call themselves an “advisor” rather than a “broker” isn’t likely to give more clarity to investors, InvestmentNews writes.

Some critics, while commending the SEC for taking a step in the right direction, take issue with the 1,000-page length of the proposal, ThinkAdvisor writes. Elliot Weissbluth, CEO of RIA consolidator HighTower, calls the result “a disheartening outcome,” according to the publication. The best interest standard proposal is unclear, Karen Barr, president and CEO of the Investment Adviser Association, tells ThinkAdvisor, and “the fiduciary standard still appears to be the broader and more stringent standard,” she tells ThinkAdvisor.

In addition, the SEC’s proposal to require investment professionals to issue client relationship summaries, or CRS, will result in “new compliance burdens” for advice firms working with retail investors, David Tittsworth, counsel with Ropes & Gray and former head of the Investment Adviser Association, tells the publication. Furthermore, the SEC’s proposal to bar some broker-dealers from using the term “advisor” or “adviser” doesn’t go far enough because it permits the use of terms such as “financial planner” or “wealth manager,” Fi360’s Thompson tells ThinkAdvisor.

Meanwhile, the lack of certainty about what the best interest standard means for investors is likely to fuel more confusion, Reuters writes. Many large wealth management companies have already made significant steps to comply with the DOL’s rule, and “it’s not so easy to turn them around,” Patricia Houlihan, chair of the Committee for the Fiduciary Standard and head of a fee-only fiduciary planning firm, tells the newswire.

“Many of them have already been marketing themselves as saying they put the best interest of clients first — I don’t know how you just reel that back in,” she tells Reuters.

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Advisors overall have welcomed the rule but are skeptical nonetheless, according to WealthManagement.com. The SEC’s proposal is “worthy” of consideration simply because it will help investors better understand what they’re getting from financial advice, Scott Freund, president at Family Office Research in Bethesda, Md., tells the web publication. Rob Foregger, co-founder of NextCapital, says the 90-day comment period the SEC’s proposal is about to undergo can help tighten it to make it into “effective regulation,” he tells WealthManagement.com. Others are more cynical about the final result: Paul Spitzer, founding member at Advanced Practice Advisors in La Quinta, Calif., tells the web publication that the broker-dealer lobby “will kill this proposal hook, line and sinker.”

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.
  • To read the Wealth Management article cited in this story, click here.
  • To read the Bloomberg article cited in this story, click here.
  • To read the Reuters article cited in this story, click here.
  • To read the ThinkAdvisor article cited in this story, click here.