by joe innace
Regulation BI Narrows Gap Between Brokers, Advisors New Market Conduct Rules Arriving
Consumer confusion concerning the fiduciary responsibilities between financial advisors and brokers seems likely to continue with a new Securities Exchange Commission rule narrowing the gap between both groups’ market conduct duties.
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or decades, Registered Investment Advisors (RIAs) have been classified as fiduciaries, requiring them to act in the best interests of their clients – regardless of their own interests or those of their firms. Broker-dealers have long been held to what the SEC terms a “quasi-fiduciary” standard to make suitable recommendations to clients. An earlier effort by the U.S. Department of Labor to hold brokers to the same fiduciary standards as investment advisors was struck down in 2018 by a federal appeals court. The SEC is addressing that issue with Regulation Best Interest (Reg BI), effective June 30, 2020. Reg BI requires brokers to act in the “best interest” of their clients. While the new rules do not hold brokers to the fiduciary standard, Reg BI sets the bar higher than the previous “suitability” standard. The new rules do not change the duties of investment advisors (although the SEC has updated some details of the RIA fiduciary obligations). However, Reg BI does introduce additional disclosure requirements for RIAs as well as broker-dealers. Both types of financial professionals must provide clients with the newly-created Form CRS (Customer/Client Relationship Summary). The document discloses information such as fees, costs, compensation, conflicts of interest,
6 / ADVISORS MAGAZINE
JULY 2020
and standards of conduct. Reg BI has drawn criticism from consumer advocates who maintain establishing another conduct standard will increase confusion among consumers who generally already do not understand the differences from an investment advisor, a broker-dealer, and a dualregistered advisor. Seven states plus the District of Columbia have challenged the standard in federal court, maintaining all parties should be held to the same fiduciary standard. SEC Chairman Jay Clayton defended creating different standards for different roles, saying that individual investors have specific needs that must be addressed separately. Distinguishing between brokers and investment advisors is likely to continue challenging consumers who often assume all roles carry the same client care responsibilities. Several investment advisors told Advisors Magazine there are some basic ways to tell the difference between those types of advisors. Two basic characteristics distinguish an investment fiduciary, a broker, or a dual registered advisor, according to Reggie Ford, CPA, founder and president of Rosecrete Wealth Management in Nashville, Tennessee. Those factors are the advisor’s fee structure, and the type of registrations and licenses they hold. “Investment fiduciaries work on
a fee-only or fee-based model,” Ford said. “The fee might be a flat or hourly rate; on a per-service basis; or on a percentage of assets under management. They are registered as an RIA, and typically hold a Series 63/65 or Series 66 designation.” Brokers work on a commissionbased model that normally pays for each transaction related to sales of investments or products,
