Wealth Management
(Washington)
If there is a core element to the debate going on over the SEC rule, it is whether the rule actually does anything new. Some argue that the SEC’s best interest rule is just a rehashing of the well-established FINRA suitability standard. For instance, the CFP has commented that “Our concern is that as introduced, the rule proposal may offer the appearance but not necessarily the reality of increased investor protection”. There are two areas of consternation about the rule, at least as far as consumer groups are concerned—the lack of a definition of “best interest”, and how the rule has differing standards for brokers versus fiduciaries.
FINSUM: While it does seem unconventional, the SEC’s lack of a definition of “best interest” means it may ultimately be more broadly applicable than defining it, and thus creating loopholes.
(Washington)
The SEC has been getting a grilling over its new best interest rule. The industry doesn’t like its proposed disclosure document (CSR) or its restriction on the use of titles, while consumer protection groups say the rule is not stringent enough. Yesterday, SEC chairman Clayton faced questions over the rule from the House Financial Services Committee. Answering questions on whether the rule went far enough and whether the rule should be harmonized between brokers and advisors, Clayton explained that brokers and fiduciaries have different relationships with clients and said “There is no conflict-free relationship … Disclosing [conflicts], mitigating them, making sure everybody understands what the motivations are ... that's what I want to do in this space”.
FINSUM: We think Clayton stood his ground quite well, and we particularly like that final quote, which was grounded in realism.
(Washington)
For an industry that was initially happy with the SEC best interest rule proposal, things have really gone south. On top of the battle over the use of the advisor/adviser title, industry critics are slamming the proposal for a new 4-page disclosure document called a “Customer Relationship Summary” which is supposed to “synopsize an advisor’s services, fiduciary status, fees and other information”. Many say the document is too long and arduous for advisors and will only confuse clients. Charles Schwab, for instance, says that the CSR “could saddle advisors with duplicative and unnecessary compliance challenges”. The firm wants a one-page version.
FINSUM: It is interesting to see that the more the industry has dug into the rule proposal, the more it dislikes it. We wonder how much the SEC will revise the rule following the end of the comment period.
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(New York)
Every investor and advisor knows the mantra: past success does not predict future performance, or some iteration thereof. Countless market studies have proven the mantra. However, what about areas where the saying does not hold true? In private, non-liquid markets, studies actually show the opposite—that past performance actually does a good job predicting future success. For instance, in private equity and venture capital, funds with performance in the top and bottom quartile are very likely to continue in that quartile time and again.
FINSUM: So this is quite an interesting finding, but one with an equally curious subplot. It is not actually the funds that are predictive of the performance, instead it is the individual dealmakers in the funds, the study found. All these results make sense to us because VC and PE are not like large liquid markets, a lot of who gets access to the best deals depends on reputation, which allows winners to keep thriving.
(New York)
Back in late 2016, Merrill Lynch announced that it was abandoning commissions for its brokers. On the back of the shift to the DOL’s fiduciary rule, the firm was forcing clients to either move to fee-based accounts or downgrade to its Merrill Edge discount brokerage. Now, with the DOL rule gone, the firm is considering reversing that decision. Merrill admits that some clients left the firm because the cost of fee-based accounts was more expensive than commissions. Merrill will be considering a change for a 60-day review period.
FINSUM: Having only fee-based accounts always seemed like a bad idea to us because a large subset of customers would see their total fees rise significantly. However, the move fit nicely with the pre-DOL rule environment. Now that things have changed, we suspect the stance might be reversed.
(Washington)
The SEC’s new best interest rule has garnered a great deal of feedback. While on the whole the industry’s reception has been positive, there is some criticism and the view that the rule needs fine tuning, particularly in regards to the use of the “advisor” title. Well, there is apparently also a big loophole in the rule: there is no best interest standard for brokers providing advice to 401(k) sponsors because such sponsors to not fall under the SEC’s definition of a “retail” investor. According to the American Retirement Association, “The commission should clarify that the definition of retail customers include nonprofessional fiduciaries of retirement plans … Otherwise, what you have is an unlevel playing field”.
FINSUM: This seems like something the SEC just missed (especially because the loophole is created by two separate components not fitting well). We suspect this will be amended.