By John Drachman
Broker-dealers are getting ready for their fiduciary makeover.
Since the founding of the New York Stock Exchange in 1792, the role of stock broker as savvy insider has been a mainstay in American culture. Characterized in the 1970s’ ad campaign “When E.F. Hutton talks, people listen,” the broker-dealer was positively portrayed as a market savant ready to provide a stock tip for an undisclosed commission.
However, the subprime mortgage crisis and the 2008 recession startled investors; then rattled the incoming Obama administration into drafting regulations to make brokers and investment advisors more accountable. Both the SEC and Department of Labor looked to hold professionals to a fiduciary standard that would put client interest ahead of a firm’s own profit-making goals.
After the Trump administration declined to implement his predecessor’s efforts, the SEC last summer finally approved a hybrid standard that combined some SEC oversight with a heavy dose of self-regulation. Thus, Regulation Best Interest (Reg BI) was born and is set for implementation this June.
What Investors Can Expect from Reg BI
The SEC’s rule addresses the obligations of broker-dealers and investment advisers in how they provide recommendations to Main Street investors.
First, it draws heavily from key fiduciary principles that guide broker-dealers in how to act in the best interest of their retail customers, including putting all agreements in writing and showing clients what they pay for –and what the firm receives in fees.
Second, Reg BI prescribes specific obligations that broker-dealers must adhere to including:
- They must have a reasonable, demonstrable basis to believe a recommendation is in the client’s best interest.
- Firms must adopt policies that identify, disclose or eliminate conflicts of interest associated with recommendations.
- Investors must be provided with a Customer Relationship Summary (CRS) that spells out the services the firm offers and provides guidance on where customers can find additional information.
Broker or advisor; what’s best for you?
Reg BI is another step along the journey that began in 1792, from transaction-driven investment sales to the cultivation of consultative relationships that incent fee-based advisors according to how well their clients’ portfolios perform.
Most importantly, what types of services do you prefer? Do you want someone managing your account on an ongoing basis or do you want recommendations for a few stocks, bonds, mutual funds and ETFs? How do you want to pay for those services? The SEC’s website offers a list of questions to ask an investment professional to help shape your thinking before making a commitment.
And if you’re not sure what to ask, you can always borrow SEC Chairman Jay Clayton’s favorite question: “How much of my money is going to fees and costs, and how much is going to work for me?”
John Drachman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.