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This Dual-Registered Advisor Argues Why Two Conduct Standards Are Better Than One

By Rita Raagas De Ramos June 20, 2019

Having two conduct standards in the investment advice industry — fiduciary for advisors and best interest for brokers — makes sense because the regulations serve a functional purpose tailored for each business model, asserts Robert Case, New York-based CEO of Ingalls & Snyder.

Ingalls & Snyder is dually registered as an advisor and broker-dealer, “so we see both sides of the issue here,” Case says. “For better or worse, we live with both regulations — more regulation than either a broker-dealer or an RIA alone.”

The fiduciary standard in the Investment Advisers Act of 1940 requires advisors to act in the best interest of clients at all times; they have an ongoing duty of loyalty and care.

In contrast, the Regulation Best Interest standard for brokers — approved by the SEC earlier this month — requires brokers to act in the best interest of their retail clients only when they are recommending a securities transaction or investment strategy involving securities.

Case says the fiduciary standard is “truly a high standard of conduct” and is “appropriate for RIAs because the client is, in effect, asking the advisor to stand in their shoes while managing their assets and act as they would act over the entire period of time of the [client-advisor] relationship.”

In analyzing the two conduct standards, Case says “it’s useful to contrast” the brokerage relationship, which is transactional in nature, to the advisory relationship.

The SEC’s Reg BI recognizes that these are “not quite the same kind of relationship,” Case says.

Thus, the SEC “is setting the bar a bit lower in Reg BI,” Case adds. “Brokers are not obliged to continuously monitor a client’s account or develop client-specific trade recommendations. Although I will say that most brokers choose to do this anyway as good business practice.”

There should be “room in the marketplace” for both business models and consequently, both conduct standards, according to Case.

Case believes clients “get more” from a fiduciary advisory relationship than from a transactional relationship, but they “pay more” for it too.

It all boils down to the client’s needs, Case says. “A brokerage relationship may be a better overall proposition than a fee-based relationship if the client doesn’t particularly need active account management.”

Although the SEC’s new best interest rule “is a lower standard than the fiduciary standard because it applies narrowly to the individual trade recommendations and not to the entire client relationship, let me just say that overall, I still think Reg BI strikes a pretty good balance for the brokerage business,” Case says.

Robert Case

Case adds that broker-dealers are subject to closer supervision that advisors, regardless of the conduct standards.

Broker-dealers have “much more active and detailed” compliance requirements from Finra than advisors have from the SEC, which he also believes is “appropriate, because broker-dealers actually take possession of client assets when they trade,” he says.

Case notes his firm sees Finra examiners who look into its broker-dealer business more frequently than SEC examiners who look into the advisory business.

The regulations and the need for examinations of firms are “more risk-driven,” according to Case. “There are some more risks in the broker-dealer world that need to be actively regulated.”

The broker-dealer business model “creates a different set of risks for clients than a pure RIA, who is simply communicating to a custodian what trades they’re doing, and the assets never leave the custodian,” Case says.

“Because of the broker-dealers’ custodial responsibilities, trade, possession and control responsibilities, they necessarily require more detailed financial regulation and supervision. It’s transactional. It’s functional. It’s really that simple,” he adds.