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Ken Fisher Slams SEC Attempt to Tighten Broker Regulation

By Rita Raagas De Ramos August 6, 2018

The founder of RIA giant Fisher Investments has slammed the industry watchdog for its attempts to write a best interest standard for broker-dealers, saying if the SEC wants to better regulate brokers, it should enforce the rules it already has.

Ken Fisher, Camas, Wash.-based founder, executive chairman and co-chief investment officer at Fisher Investments, believes the SEC should enforce the Investment Advisers Act of 1940 and not “invent” a new standard for brokers.

Fisher’s comments were among the more than 2,500 the SEC received on its three-part Regulation Best Interest package before the August 7 deadline for the industry and individuals to say their piece about the set of proposals aimed at protecting investors while preserving the broker-dealer business model.

“Applying a best interest standard to brokers is counterproductive,” he says. “It will further confuse the investor by making it harder to differentiate between brokers and investment advisers. If the underlying problem is boundary confusion, changing the wording of the duty a broker owes to an investor does not address the problem. It certainly does not address the fundamental financial incentives tied to compensation.”

Instead, the SEC should enforce the boundaries established in the Advisers Act, according to Fisher.

“I urge the Commission to begin strictly enforcing the ‘solely incidental’ language in the Advisers Act, like a parent starting to strictly enforce bedtime after a long summer vacation, which for the brokerage industry has lasted for more than two decades,” Fisher says.

After all, giving investment advice is indeed only solely incidental to the broker’s brokerage activities, unless the broker is also dually registered as an investment advisor, he explains.

Separately, Fisher points out that having dually registered companies and individuals leads to “immense confusion” among investors and is “ripe for abuse.”

Ken Fisher

Thus, the SEC should “propose very clear, bright lines for dual-registrants,” according to Fisher. He says dually registered individuals need a completely separate title to classify them – such as “broker-adviser” and they should be required to use it exclusively.

“In practice, the ability to change hats permits dual-registrants to hide the ugly reality that investors have no idea what they are getting. It could be advice from an investment adviser bound to act in their best interests with care and loyalty, or it could be a suitable product recommendation from a broker required only to treat them fairly,” Fisher says. “The investor has no way of knowing.”

Under the proposed best interest rule, brokers who are also registered as investment adviors would be allowed to keep their advisor title, but they would be required to clearly inform the customer whether they are acting as a broker-dealer or as an advisor when they are making a recommendation.

Fisher says investors need a reliable way of knowing when a dual-registrant is switching hats. For example, dual-registrants must be required to follow a script, such as: “Preface all broker recommendations with ‘I am now acting as a broker. If you buy these products, I will get a commission,’ and all investment advice with ‘I am now acting as an investment adviser. You pay me a fee for this advice.’"

Other examples presented by Fisher include requiring different colors in disclosure documents, depending on which role the dual-registrant is performing; requiring different representatives to provide brokerage service and investment advice, “or maybe even requiring individuals to literally switch hats or wear a sign around their necks with the disclosure on it.”

Meanwhile, Fisher believes brokers who aren’t dually registered should only be allowed to use the broker title, while insurance producers, financial planners and anyone else who may want to give investment advice should likewise be prohibited from referring to themselves as “advisers.” In fact, the word “advisor” – with an “o” – should be banned entirely, he adds, to stay in line with the Advisers Act.

Beyond Fisher’s comments to the regulator, there is no shortage of concrete recommendations from the commenters, including keeping it simple (the best interest guidelines, the customer relationship summary form and various other parts of the proposed package); calling brokers "salesmen" to set the record straight with investors; and allowing compliance exemptions for the smallest broker-dealer firms.

Some are calling for the SEC to abandon the proposed best interest regulation altogether.

Ethan Braid, Denver, Colo.-based president of RIA firm HighPass Asset Management, says the proposed best interest rule should be discarded because it “will create even greater investor confusion and allow brokers to be the wolf in sheep’s clothing.”

“By passing this proposed regulation, brokers will be able to act and look like fiduciaries and at the same time still be able to sling products for commissions,” he says. “How is this in the best interest of a client?”

Braid adds: “Who in their right mind believes that by simply requiring brokers to give more disclosure – which will be complicated and not understood by most investors – they can still sell commission products and the sale can somehow be in the client’s best interest? Rubbish. Pass this proposed regulation and you only harm the investing public.”

A commenter who identifies himself as Robert Moulton-Ely says “unless the broker is bound by the fiduciary rule, the broker must be called a salesman, saleswoman, or sales person” for simplicity.

Applying a best interest standard to brokers is counterproductive. It will further confuse investors. It certainly does not address the fundamental financial incentives tied to compensation.
Ken Fisher
Fisher Investments

There should be “draconian penalties for anyone who claims to be anything different,” Moulton-Ely says. “It is nonsense and disingenuous that my broker is called a financial advisor when the fine print in the 20+-page account agreement explicitly says he has no obligation to give me unbiased advice or even good advice.”

Robert Shaw, Waterloo, Iowa-based founder of RIA Shaw Financial Services, says the SEC should consider banning the term "best interest" and rename the proposed regulation the “Investor Protection Act” or something similar.

“The confusion comes into play because fiduciaries commonly use the term best interest,” Shaw says.

David Trainer, Nashville, Tenn.-based CEO of research firm New Constructs, says the SEC should focus on guidelines that clearly state the expectations involved in the advisor/client relationship.

These expectations must include, according to Trainer, requirements to be comprehensive (“consider all relevant data about the client”), objective (“unbiased advisor”), transparent (“client should be able to see all the aspects of the investment process”) and relevant (“investments should have a clear connection to a client’s financial goals”).

Robert Muh, Napa, Calif.-based CEO of full-service investment banking firm Sutter Securities, says micro broker-dealer firms – which he defines as those that employ 10 or fewer associated persons – should be given the option to seek exemption from complying with the proposed best interest rule because the costs would be too much to bear for the small businesses.

Muh estimates there are 1,775 broker micro broker-dealer firms -- or almost 50% of Finra’s member firms. He says these firms are not likely to have a full-time compliance officer, much less a compliance department.

If micro broker-dealer firms go out of business, the small account clients handled by these firms will be affected, he warns.