Advice or a Salespitch?

How do you know when a financial recommendation is worth heeding? Red tape and legal jargon aside, it’s about finding an advisor who exemplifies a few simple ideals:

“There’s no confusion in the minds of investors as to what they want. They’re very clear. They want somebody they trust who makes recommendations that put their interest first and don’t allow the advisor to profit financially at their expense.”

— Phyllis Borzi, Dept. of Labor EBSA head, 2009–2017

That makes sense, doesn’t it? There’s even a term the investment world has been using since at least the 1940s to describe this highest standard. It’s called fiduciary advice.

Why Fiduciary Advice (Still) Matters

Fiduciary advice makes sense to us too. You deserve nothing less than the fairest possible shake from anyone entrusted with advising you about your personal wealth. For decades, the fiduciary standard has shaped this highest level of care for those of us committed to delivering it.

Having a fiduciary duty to our clients should put us on similar footing with other professional consultants, such as physicians or attorneys. You hire us partly because we have dedicated our career to understanding every facet of your wealth. But you also hire us to always use our knowledge to advise you according to your highest financial interests – even ahead of our own.

However, to our frustration, it has probably become harder instead of easier for you to know when you are receiving this level of care … and just as significantly, when you are not. As Borzi adds, “everybody claims to be a trusted advisor when some are really only salespeople.”

Unfortunately, the fiduciary standard has been under attack lately. A recent Securities and Exchange Commission (SEC) overhaul has downplayed rather than strengthened its significance by overlaying it with a new industry standard, paradoxically called “Regulation Best Interest.”

Regulation Best Interest: One Size Fits None?

You may not have marked the day, but June 30^th, 2020 was a big one for financial practitioners across the country. It was the day the SEC’s Regulation Best Interest (Reg BI) took effect.

Reg BI does not require you to do anything. It’s aimed at those of us offering you advice or recommendations. Here is an SEC excerpt:

“[Reg BI is] designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.”

At face value, this seems reasonable, if vague. Here’s more from the SEC (emphasis ours):

“Individually and collectively, these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.”

Still not crystal clear? In English, the intent is to ensure you (the “retail investor”) have enough information to decide whether a professional investment recommendation is best suited to your needs, essentially no matter who is offering it.

That still seems logical enough. But let’s take a closer look at how investment advice “best suited” for you in theory may translate in practice.

“Apple and Orange” Advisory Differences

In our mind, new regulations should either eliminate, or at least make it easier for investors like you to recognize two very different practices that still exist side by side in the financial industry:

“Full-time” fiduciary advisors offer a fiduciary level of care throughout their relationship with you.
“Best interest” recommendations can be one-off pieces of advice you may receive during point-in-time transactions.

Despite its promising name, Reg BI may muddy what clarity had existed between these higher and lesser standards of care. By attempting to apply the same broad rules to both, Reg BI has the potential to discount the still-stark differences between them:

A Reg BI Checklist for Fiduciary vs. Broker-Dealer Investment Recommendations

	Ideal Full-Time Fiduciary Advice	Typical Broker-Dealer Investment Advice
Relationship	Your advisor’s sole, continuous duty is to advance your highest financial interests (even ahead of their own).	A broker, banker or insurance rep offers other core services, along with point-of-sale investment recommendations.
Primary Role	Your advisor deeply understands and accounts for the details of your total wealth interests, and advises you accordingly, *always in a fiduciary capacity*.	A broker’s primary role is to transact trades; a banker holds accounts; an insurance rep sells insurance. Incidental investment advice is secondary to these roles. *Not all transactions are subject to fiduciary duty. It's your responsibility to tell when a fiduciary duty applies or does not apply.*
Employment Status	As a fully independent Registered Investment Advisor (RIA) firm, your advisor’s only “boss” should be clients like you.	Employed by a bank, brokerage house or insurance agent, a broker-dealer’s, banker’s, or agent’s “boss” is their employer. Be especially cautious if your advisor is "dually registered" as a broker-dealer and as a Registered Investment Advisor (RIA).
Compensation	Your advisor’s compensation should preferably be *fee-only*, so their only financial incentives come from clients like you.	*Commissioned* or *fee-based* intermediaries earn part or all of their keep from their employer or through other (often opaque) sales incentives.
Investment Policy	First, it’s essential to have an agreed policy. It should be grounded in evidence over emotion, structured to manage all your investments in unity, and tailored to patiently capture expected returns according to your personal goals and risk tolerance.	Investment recommendations are more typically offered as a point-of-sale, add-on service. They are unlikely to be guided by your big-picture plans; coordinated with the rest of your assets; or personalized to advance your total wealth interests.
Financial Planning	Your advisor should offer financial planning services - financial advice beyond investment management - as a core service. Ideally, you are guided by a CFP^® Professional and you spend most of your time together discussing the financial actions to take beyond investment selection and monitoring.	Financial planning is typically offered as an add-on service, if at all¹. Since investment management is the focus, not financial planning, a financial plan may use relatively generic inputs, or maybe a one-time event rather than an ongoing conversation.
Conflicts of Interest	Ideally, your advisor has minimized (and actively seeks to avoid) any conflicts of interest by embracing all of the above best practices – not only because it’s required, but because it’s the right thing to do.	New regulations aimed at minimizing conflicts of interest may have been tacked onto, rather than integrated into the company’s core role and mission. Disclosure is more important than the avoidance of conflicts of interest.

Our Take on Reg BI: Less Isn’t Always More

How could one set of regulatory rules apply equally to both lesser and higher standards of care?

In theory: Both groups should minimize their conflicts of interest, and disclose any inherent conflicts they cannot eliminate.

In reality: When is the last time you read a financial disclosure, and understood what it meant or asked probing questions until you did? For most of us, it’s been a while. As such, legal disclosures alone may fail to protect investors from falling for sales pitches in disguise.

In practicality, this means:

Continued double standards: Suffice it to say, Reg BI leaves some large legal loopholes to be leveraged by those who wish to continue offering incidental investment advice.
Business as usual: “Best interest” recommendations may still end up tainted by unnecessary conflicts of interest (such as compensation models that don’t actually align with investors’ best interests) and/or an incomplete understanding of your greater financial goals.
More due diligence: You, the investor, must still sort out which side of the table an investment recommendation is coming from. Worse, the well-established terminology that used to help you distinguish fully fiduciary from merely suitable advice has been subsumed under the fuzzier, untested language of Reg BI.

What Comes Next?

To say the least, we are underwhelmed by Reg BI – and we are not alone.

Jane Bryant Quinn, a veteran financial journalist, described the new landscape as follows:

“[Reg BI] creates fake fiduciaries. It’s a disaster for investors because now a salesperson can basically say, ‘I have your best interest at heart — I put your interest ahead of mine.’ They’re allowed to use exactly the same language that fiduciaries use but without actually being fiduciaries.”

Here is additional commentary from Borzi:

“Ironically, the final [Reg BI] product that emerged from the SEC not only did not address this endemic problem of conflicted compensation, but also exacerbated investor confusion by allowing brokers to market themselves as working in their clients’ best interest without actually holding them to a clear, fiduciary best-interest standard or ending the harmful incentives that conflict with that standard.”

Here is one more take from “Nerd’s Eye View” financial thought leader Michael Kitces:

“[I]n issuing the new Regulation Best Interest rules, the SEC declined to equalize the standard of care for broker-dealer-delivered versus RIA-delivered advice as mandated by Dodd-Frank, and instead expanded the broker-dealer exemption that would allow broker-dealers to even more easily provide comprehensive financial planning advice without being subject to a fiduciary standard for that advice … which creates, literally, a double-standard for the delivery of financial planning advice.”

Fortunately, this tale of fiduciary peril is not yet over. We, Kitces, Borzi, and many others like us continue to press for legal, political, and industry reforms to cut through the confusion.

We hope to update this important piece over time with improved news. Until then, we encourage you to use the table above as a handy checklist for determining when an investment recommendation is most likely to truly be in your highest financial interest … and when it is not.

What additional questions can we address for you at this time? Please let us know.

1 - The worst of both worlds? Dual-registered investment advisers. Nicole M. Boyson, Ph.D., Northeastern University, D’Amore-McKim School of Business. May 3, 2019.