What the SEC’s “Advice Rule” Means For You

Copyright: <a href='https://www.123rf.com/profile_designer491'>designer491 / 123RF Stock Photo</a>Folks, over the past several years there are few topics I’ve written about more in the pages of Cutter Family Finance than the U.S. Department of Labor’s fiduciary rule. I’ve covered what the rule means, what was supposed to change, and the scheduled implementation date. I’ve also talked a lot along the way about the delays in its implementation.

This week, I am going to give you an update, but first let’s back up a bit just in case you need a refresher, or this information is new to you. Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs) are legally obligated to adhere to a fiduciary standard that requires they put their clients’ best interest first, always. Brokers and brokerage houses are not (unless a broker is dually licensed, in which case he or she may be). They operate under a less-stringent “suitability” standard – their advice must only be suitable to their clients’ situation, and that does not always equate to what’s best for the client.

The Department of Labor’s fiduciary rule, as it was initially envisioned, sought to protect individual investors who were pushed into investments that were a better deal for their financial professional than for them – conflicts of interest that in 2015 the White House Council of Economic Advisors calculated as costing American consumers $17 billion a year. Don’t misunderstand what I’m saying – many brokers do operate in their clients’ best interest. But the plain and simple fact of the matter is that they’re not required to.

Back in 2016 the Department of Labor (DOL), under the previous administration, sought to change this by making the fiduciary standard uniform across all financial professionals who work with retirement plans or provide retirement planning advice. Some of the provisions of that rule went into effect, including those requiring such professionals to only provide advice that is in their clients’ best interests, to charge reasonable compensation and not make misleading statements. However, in April of last year, President Trump signed a memorandum rolling back the fiduciary rule and asked the DOL to review it again.

In March of this year, a three-judge panel of the Fifth Circuit Court of Appeals vacated the fiduciary rule in a split decision, claiming that the DOL overreached by requiring all financial professionals providing retirement investment advice to be held to a fiduciary standard. The DOL has 45 days from entry of that judgment to request a hearing by the full panel of the Fifth Circuit Court, or to ask the Supreme Court for permission to appeal the decision. As I write this article, it is unclear whether the DOL will do either.

In the interim, the U.S. Securities and Exchange Commission (SEC) is not (and has not been) sitting still. The SEC has proposed a new “Advice Rule” to reform the standard of conduct used by brokers and brokerage houses.

The changes replace what the DOL proposed with stiffer standards than existing SEC requirements, so look, it’s a step in the right direction. For example, brokers can’t call themselves advisors or give themselves titles that imply they are held to a fiduciary duty. And brokers also need to disclose all “key facts” to their clients involving potential conflicts.

However, the SEC has also left a lot up in the air. The Advice Rule does not define “best interest,” for example. It doesn’t require brokers to assess what’s the best investment for their clients. And it doesn’t ban any specific practices. And again, this proposed Advice Rule is specific to brokers and brokerage houses, not all financial professionals, falling short of the standard put forth by the DOL.

The proposed SEC rule comes in a 1,000-page tome which seems to leave a lot of wiggle room for brokers and brokerage houses and has already been met with criticism from some commissioners for its vague and confusing language.

The SEC proposal was put forth in the middle of April, and the organization is taking public comments for 90 days. It then plans to amend the proposal before holding a second vote to determine if the regulations will become binding.

The bottom line is this: the SEC’s proposed rule changes stop short of imposing a uniform fiduciary standard for all financial professionals dealing with retirement accounts.

With so much of this still in flux, what can you do to protect yourself?

If you’re currently working with a financial professional, make sure to understand what standard they are legally obligated to abide by. If your financial professional operates from the fiduciary standard, then they must charge transparent and reasonable fees, and they are required to work in your best interest. The fiduciary standard is already enforced by the SEC.

Other financial professionals, who operate from the suitability standard, are not subject to the same requirements. As explained previously, they are permitted to make recommendations that are suitable for their clients, even if those recommendations are not in their clients’ best interest.

One way to determine what standard your financial professional is held to is to ask what registrations he or she holds. Someone who holds a Series 7, 6, or 63 license is probably a broker, sometimes known as a registered representative. IARs and RIAs, by comparison, generally hold Series 65 licenses.

It is possible for advisors to hold more than one license. This is referred to as being “dually licensed.” It’s critical for you to ask such a professional whether they work from the fiduciary standard or the lower suitability standard. Don’t be afraid to ask your financial professional about their experience, credentials, education, and certifications. You need to know you can trust the person helping you make important decisions that will affect your financial future.

The Department of Labor and the Securities and Exchange Commission will continue to make reforms and changes to the financial industry, but that does not and should not stop you from making informed choices about the management of your investments. Understanding the different roles, responsibilities, and rules that apply to the people you’re entrusting with your financial future is critical, regardless of what happens in Washington D.C.

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President at Cutter Financial Group, LLC. A wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

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