A pro-fiduciary advisor trade group has unveiled a “Conflicts Are Deadly” ad campaign that, while referencing the Covid-19 epidemic, accuses the SEC of failing to mitigate costly broker-dealer conflicts of interest in its new Regulation Best Interest regulation.

The Institute for the Fiduciary Standard press conference yesterday, moderated by TD Ameritrade Skip Schweiss, unveiled three ads designed for independent fiduciary registered investment advisors who want to tell investors that they alone are held to a fiduciary standard when providing retail investment advice. In contrast, brokers and registered reps will be held to a lesser “best interest” standard when Reg BI is implemented June 30, speakers said.

“We made a decison that we’re going to be blunter and sharper in calling a spade a spade,” Institute President Knut Rostad told Financial Advisor Magazine after the event. “We have started blasting these ads out on social media. And, yes, these ads can be personalized by advisor members. We will also be coming out with a booklet for investors that explains the true cost of broker-dealer conflicts of interest."

The “Conflicts can be deadly” ad features a masked figure holding a gloved hand up to the camera, with the words "Stop  Covid-19" written on the palm. “A SEC regulator has called conflicts ‘viruses’ and ‘a mortal threat to the body.’ Brokers’ firms disagree and welcome conflicted payments. Find a fiduciary who avoids these viruses,” the ad reads.

Phyllis Borzi, chief architect of the now-defunct U.S. Department of Labor fiduciary rule, said “weak though the rule is, the SEC will have to enforce it.” To do that, she argued, the SEC will need to focus on the newer fund share classes and their conflicted fees—most specifically revenue sharing arrangements.

“While I seriously doubt that this rule can ever by effectively enforced at all, unless the SEC focuses on these newer revenue-sharing agreements ... the harm to investors will continue and perhaps be exacerbated,” said Borzi, who also faulted the SEC for failing to define what it means by best interest or conflict mitigation in the new standard.

Morningstar made the same point about hidden revenue-sharing fees in a white paper it released in November. “Despite changes in industry practice, the SEC has not historically focused on revenue-sharing arrangements, but rather on the once-typical practice of paying for distribution out of the expense ratio. Even though revenue sharing has not been heavily scrutinized, it has the potential to create a variety of distortions in the advice investors receive from brokers. Furthermore, because of the lack of focus, the disclosures on revenue sharing are very limited; they are presented in an open-end format that stifles efforts to summarize and quantify the wide variety of  potential conflicts of interest they create,” the company said.

Revenue sharing payments based on sales, assets or accounts, platform fees, data fees and select list fees are all opaque, poorly disclosed to investors and most likely to create costly conflicts of interest for investors, Morningstar concluded.

Deborah Bosley, a disclosure expert, said at the press conference that studies shows that most investors do not read securities disclosures, and those who do often don't understand the legal terms. “Disclosure does not equal investor understanding,” said Bosley, whose consumer testing of Reg BI last year found that investors did not understand the cost of registered rep conflicts.

“The SEC continues to say brokers fees will be disclosed. What is disclosed is sources of fees, but actual fees and expenses a customer pays are not disclosed,” Rostad added.

Tamar Frankel a professor at the Boston University School of Law, said she will highlight these key points in a forthcoming paper.

“It is time for the commission to remember that it is the fiduciary of this country, its securities system and its citizens—investors. The commission is not an arbitrator among the conflicting parties in the market place,” Frankel said at the press conference.

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