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.
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.
After the shock of the last rule and the relatively benign impact of the SEC’s Reg BI, most advisors are taking the new Fiduciary Rule from the DOL in stride. There has not been nearly the outpouring of upsettedness as the first time around. However, within the mostly mundane-seeming rule, there is some little-noticed language that could cause difficult issues, say compliance professionals. Specifically, in the preamble to the rule proposal, the DOL said it had changed how it interprets the old 1975 five-part test for fiduciary status. According to David Kaleda, principal, Groom Law Group, “So, this is another attempt by the DOL to state that, ‘Whatever you think advice may be, it may be more than that’ … Advisers and broker-dealers need to think about whether their day-to-day interactions are within the five-part test”.
FINSUM: This is another hidden surprise in this rule that could become much more complicated. It almost seems the DOL snuck some vague language into the current version of the rule in order to give themselves broader latitude for enforcement later on. This makes sense too, as it was the same approach the SEC used with Reg BI. Vague language makes it harder to find loopholes.
The nature of financial advice needs to be constantly evolving to client needs. The industry is generally responsive to this, one need only look at the large growth of independence and fiduciaries since the Financial Crisis. One new direction clients are driving advisors towards is goals-based investing. The main idea is to invest a client’s assets with particular life goals in mind (and not just retirement!), and then report on the progress towards those goals over time. The aim is to empower clients to meet their objectives and make saving and investing feel less abstract. Asset managers are also getting on board. For instance, Franklin Templeton has just announced the launch of their new Goals Optimization Engine, which “provides investors with personalized investment paths for their unique goals, and allows financial professionals a scalable way to offer a differentiated investment solution and deepen client relationships”.
FINSUM: Getting into the behavioral psychology aspect of this, studies have shown that individuals often have a hard time saving now for gains in the future—the desire for instant gratification works against long-term interests. Therefore, by focusing on near- and long-term goals, you make saving less boring and abstract, which helps clients commit.
When the pandemic first hit, recruiting slowed down, with less advisors moving firms. However, after a couple of months, things started to pick up. According to a TD Ameritrade survey, 40% of advisors now say they are more likely to move than they were before the pandemic. Only 15% say they are less likely. If one comment sums up the increased velocity of recruiting, it might be this, “Advisors are at home and working in an independent environment. That can cause them to question what they are paying for at their firm. ‘Do I need the overhead and management of the wirehouse? Am I doing alright without it now?”.
FINSUM: On top of the questioning of whether all the overheads associated with a wirehouse make sense when they are working from home, the other big thing driving moves is the simple fact that it is easier for recruiters to reach advisors when they aren’t in the office. This makes the whole courting and exploration period much simpler.