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There has been a lot of speculation that with Biden leading in the polls, Reg BI may be likely to get scrapped next year. Now obviously no one has great insight into how the election will go, but according to former regulators, even if Biden gets elected, it seems unlikely the rule would get scrapped. According to a former regulator at FINRA, the SEC has both cultural and structural barriers to overturning the rule. The SEC is run by a group of five commissioners, no more than three of whom are allowed to be from one party at any given time. Furthermore, while the White House does appoint a head of the commission, the group likes to set its own fresh agenda, and therefore largely sets its own objectives. According to Thomas Selman, a former vice president for regulatory policy at the Financial Industry Regulatory Authority, to “reverse it right away, it's just not something they have an appetite for”.

FINSUM: No one is certain how this will play out. However, in our view the most likely path is not getting rid of the rule, but rather much stricter enforcement of it. The rule itself leaves much to enforcement discretion, so that seems an easier avenue than scrapping and re-creating a new rule.

(New York)

Any advisor can tell you that while Modern Portfolio Theory (MPT) has a lot of strengths, it also has many shortcomings as it relates to investor psychology. For instance, Modern Portfolio Theory asserts that multiple aims can be achieved within the same portfolio, but this does not mesh well with how investors think about money—where each account has its own life purpose. Secondly, risk is an area of major disconnect. Portfolio Theory looks at risk in terms of historical standard deviations of volatility, whereas humans think of risk in more life-relevant terms: what I my portfolio does earn enough to pay for my child’s tuition? This is where goals-based investing comes in, as it focuses on how portfolios can be constructed—and reported on—in such a way as to match investor psychology about the life goals they are trying to achieve.

FINSUM: MPT has been revolutionary for quantifying risk and return profiles, but for many it simply does not resonate on the “human” level needed for some advisors to motivate and connect with their clients.

Thursday, 24 September 2020 15:21

How Reg BI Makes Brokers Legally Bulletproof


Reg BI was technically implemented three months ago, but it is still a little bit of an unknown quantity. More than just the shortness of its tenure, the fact that the SEC has explicitly said it is going to be light on enforcement during COVID means the pace of adaptation and understanding has been slower. Well one interesting aspect is emerging—the rule seems to give brokers a huge legal advantage when they get sued. According to a panel of top industry lawyers, the “informed consent” part of the rule means that Reg BI essentially creates a buyer-beware trap for clients. This will make it very hard to prevail over an advisor in a dispute. According to a law professor at Georgetown “If you take the recommendation, that becomes consent … The commission uses words that will live a long time on the defense side. When there has been full and fair disclosure, informed consent is present where the customer affirms by accepting the recommended action”. The language of the rule is claimed to be so obtuse that most clients will never read or understand it.

FINSUM: This was hinted at by those that opposed the real, but the scale of the advantage for brokers is only now being realized. That said, the effectiveness of Reg BI will largely come down to enforcement, which will likely shift over time.

Thursday, 24 September 2020 15:20

How Goals-Based Investing Helps Clients

(New York)

Goals-based investing is an important approach for advisors to consider for their clients. More than just the idea of aligning a portfolio and its reporting with a client’s life goals, goals-based investing has the power to potentially transform the way a client thinks about their money and their portfolio. When it comes to saving and investing, clients constantly struggle with the trade-off of short-term sacrifices for long-term benefits—should I buy this flashy new car or have a better retirement? By focusing their finances and investing on the specific goals they have in mind (e.g. buying a vacation home) it becomes much easier to make that short-term sacrifice.

FINSUM: Goals-based investing makes a lot of sense with basic human psychology. Knowing I am saving for a vacation home makes it a lot easier to forego the new car purchase.


2020 has seen both the implementation of the SEC’s new Reg BI rule as well as the introduction of a new DOL Fiduciary Rule proposal. While both have faced opposition on all sides, it was uniformly less intense than the scorn the first fiduciary rule received. That said, Morningstar is reporting that plans are underway to scrap the new Reg BI rule, which only became official in June. More specifically, Biden is planning to scrap both rules if he takes office. That is obviously still a very big if, but the process is quite clear. Biden would appoint a new head of the SEC, who would then scrap the rule. Or, the Dodd-Frank act could be amended to make clear a full fiduciary rule needs to be in place.

FINSUM: There has been plenty of talk about Biden potentially scrapping the new DOL rule. However, very little has been said about him getting rid of Reg BI, likely because it would have been implemented many months before inauguration. Therefore, this is a significant change that many advisors and firms are not aware of.

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