RIAs were shocked and stunned by the SEC’s new Best Interest rule. The reason why comes down to one word. By substituting an “and” for an “or”, the SEC basically dissolved the necessity for fiduciary duty of RIAs. Fiduciary duty until now was defined by advisors having to avoid all conflicts of interest AND make a full disclosure of all material conflicts of interest. Now the rule will have an “or” instead of an and, meaning RIAs could abide by the rule simply through disclosure, eliminating a key tenet of fiduciary duty. One industry insider commented bluntly, “It guts the RIA industry”, continuing “RIAs are not fiduciaries anymore”.
FINSUM: This is a big deal for the RIA business because it means a whole slew of new advisors can call themselves RIAs but not meet the standard and reputation that has been cultivated over decades.
Barron’s has published a piece which covers a survey of wealthy Americans. The survey sought to find out how the wealthiest Americans felt about Senator Elizabeth Warren’s plan for a wealthy tax of 2-3% on those with over $50m or over $1 bn in wealth. The results were surprisingly, with 60% of wealthy respondents saying they would embrace the plan. The feedback was split on party lines, with 88% of Democrats agreeing, 62% of independents, and 36% of Republicans in favor of it.
FINSUM: We are somewhat skeptical of these stats. Advisors, please email us with any anecdotes on how your clients have reacted to this plan.
Whereas the DOL’s first fiduciary rule was highly specific, the SEC’s new version of the best interest rule is anything but. The first version of the rule was reasonably vague, such as not defining “best interest”, but this new version is even more cloudy. For instance, industry players cannot agree if the rule is stronger or weaker than the last version. Some language has been removed that might make the rule seem weaker, but on the other hand, so much of it is constructed in a manner than tries to use context to make rules, that it is hard to tell. For instance, even the head of trade group Investment Adviser Association says that "People can look at this interpretation and select phrases that concern them or comfort them”.
FINSUM: The interesting thing here is that the SEC has deliberately taken the route of making the new rule implicit versus explicit. The whole methodology is designed around not defining things so that they cannot be worked around, but that makes the whole body itself up for interpretation.
Brokers around the country had a very positive reaction to the new version of the SEC’s Best Interest Rule which was approved last week. One of the reasons why, other than the generally light-touch direction of the regulation, is that the new rule seems to suggest that a broker can always be confident in putting money into an IRA when considering a rollover. However, the SEC has just warned brokers against this quick conclusion, saying they cannot short-circuit their analysis.
FINSUM: The way the new rule was structured seemed almost too good to be true for advisors as it appeared to heavily favor rollovers into IRAs. More analysis of the rule will be forthcoming over the next week.
It happened quickly, more quickly than almost anyone expected. The SEC redrafted its “Regulation best Interest” rule and put it to a vote yesterday, with the new version being approved by a 3-1 vote. The new version is a fairly large departure from the previous one, and went in the complete opposite direction versus expectations. Instead of tightening the rule to put more fiduciary duties on brokers, it did the opposite, eliminating language regarding best interests and seemingly watering down the current suitability standard itself. The vote against the rule came from the SEC’s only Democrat, who said “Rather than requiring Wall Street to put investors first, today's rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice. Even worse, contrary to what Americans have heard for a generation, the commission today concludes that investment advisors are not true fiduciaries. Today's actions fail to arm Americans with the tools they need to survive the nation's retirement crisis.”.
FINSUM: In addition to the changes mentioned above, it is also worth noting that the new rule significantly expanded the language regarding “solely incidental”, meaning many more brokers do not fall under the rule’s purview. Now it remains to be seen what the DOL does.
Independent or wirehouse? It is a big decision, especially because it not only means moving firms, but going from being an employee to running one’s own business. Well, to fill the void between those two possibilities, LPL has just launched a new program designed to let advisors half-breakaway. The program lets advisors be independent, but also employees. The new new offering is short on details but follows in the footsteps of Raymond James and Wells Fargo, both of whom have similar opportunities.
FINSUM: This seems like a good option if you are an advisor that wants more flexibility, but does not want the difficulty associated with running your own firm.