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Wealth Industry Blasts SEC "Best Interests" Move

Tom Burroughes

7 June 2019

The US Securities and Exchange Commission may have hoped that its new rule calling for brokers to act in the “best interests” of clients would draw a line under months of controversy. That goal has not been attained, with industry figures saying the outcome is confusing and a "travesty".

SEC commissioners this week voted by three to one for the Regulation Best Interest, and supported other actions to improve disclosures and clarify advisors’ responsibilities. Regulators had started proposals for such a move a year ago. They follow a failed attempt by the Department of Labor to enact a fiduciary rule that would have introduced a “best interests” test of how financial advice is provided.  

Michael Zeuner, managing partner at WE Family Offices, said the new rules were a “travesty for investors”. 

“The SEC has failed in its duty to protect investors’ interests. The new `Best Interests’ standard is a far cry from the existing fiduciary standard required of registered investment advisors. Reg BI essentially sanctions conflicts of interest as an accepted part of the wealth management business and simply requires that they be disclosed. The Fiduciary Standard requires conflicts to be, first and foremost, avoided; unavoidable conflicts are to be disclosed. A big difference. Disclosure of conflicts doesn’t make the conflict any less harmful to the investor,” Zeuner said.  

“And to make matters worse, by branding the standard for broker-dealers as a `best interest’ standard the SEC has given the industry a free pass to claim they put clients’ interests ahead of their own, as a fiduciary does, when the new regulation requires no such thing,” Zeuner said.

“The burden continues to fall to investors to protect themselves and seek out registered advisors who must adhere to a higher fiduciary standard. What started out as an effort by Congress to protect investors by requiring the SEC to develop a standard for broker-dealers that was `no less stringent’ a standard than the existing fiduciary standard, has ended up being a watered down, sugar-coated standard that won’t protect investors, but certainly will confuse them,” he added.

Regulators say introducing such “best interests” tests will make financial advice more objective, although some critics have argued that the measures don’t go far enough. This news organization recently carried a range of views from wealth management figures about what they regard as the true test of independent financial advice – not as easy a term to define as might first appear. For some, such as Zeuner, the key test is that an advisor does not sell his or her own products to clients, period.

Abbot Downing, part of Wells Fargo, said: “Wells Fargo believes retail investors deserve a best interest standard of conduct when receiving personalized investment advice. Wells Fargo has been a consistent and vocal advocate for the adoption of a standard of conduct that ensures that retail investors’ interests are always put first, while also preserving access to the financial information, advice, and account choices they need to help them achieve their financial goals,” Lisa R Featherngill, head of legacy and wealth planning, said. 

Jamie McLaughlin, a consultant to the wealth management industry and a former Republican lawmaker, was scathing. 

“The near-term outcome for investors is more rather than less confusion. Brokers, many of whom legitimately perceive themselves to be de facto agents for their clients, can now claim to be more aligned with the best interests of their clients. However, by operation of law they are agents for their firms and the asset management companies for whom their firms have selling agreements,” he said. 

“I just read a related news account that reported `the industry hailed the proposal’. What balderdash - in fact, the `industry’ remains very much divided if we consider wealth management as comprised of four types of firms who operate under four distinct regulatory regimes. Perhaps what they should have said is that broker dealers and commercial bank broker dealer affiliates hailed the proposal,” McLaughlin continued. “Finally, may I observe the SEC commissioners predictably voted along party lines. Speaking as a former Republican politician, it’s notable that all the Republican commissioners hid behind the tenuous principle of unbridled `free markets' and, perversely, in favor of consumer rights,” he said. 

Charles Lowenhaupt, chairman & CEO, Lowenhaupt Global Advisors, said: "This regulatory adventure simply reinforces that wealthy families cannot rely on the government or on someone else thinking about `best interests’, which is not an objective standard. Due diligence and risk management require disciplined investment process designed around basics such as understanding purpose, transparency, fiduciary analysis, independent reporting, and other principles of private wealth management. For the smaller investors, simplicity seems key - traditional portfolios of stocks and bonds. For the very wealthy, independent process provides protection."

SEC statement
“The Securities and Exchange Commission today voted to adopt a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisors and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access to a variety of investment services and products,” the SEC said in a statement earlier this week.

“Individually and collectively, these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisors, 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,” the SEC continued. 

“The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades,” SEC chairman Jay Clayton, said. “This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisors in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”

The SEC said that under its best interest regulation, “broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer”. 

“Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations,” it said. 

The regulator said its Form CRS Relationship Summary will “require registered investment advisors and broker-dealers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional”. 

Even before such rules loomed into view, there has been a shift towards fee-based advice in wealth management and away from commission-based sales payments to brokers. A similar pattern has taken place in the UK. Pressure for higher standards increased after the 2008 financial crash, which exposed cases of poor and biased advice.