For decades registered investment advisors have had an organic marketing advantage: By law they were fiduciaries who had an explicit duty of care and loyalty that required them to put their clients’ best interests before their own. 

That pronounced advisor advantage is a lot fuzzier post Regulation Best Interest—the package of new retail advice regulations the Securities and Exchange Commission approved last week, experts told Financial Advisor magazine. 

Numerous areas of the SEC’s rule blur the differences between RIAs and brokers and cloud the supremacy of advisors’ long-golden fiduciary standard, said Duane Thompson, a senior policy analyst with fiduciary consultancy Fi 360. One area that may contribute to the blurring is in the customer relationship summary disclosure language the SEC is mandating for advisors, brokers and hybrids. 

“Advisors may be able to say that they are fiduciaries and that brokers are not, but the Form CRS disclosure mandates the use of boilerplate language stating ‘we have to act in your best interest and not put our interest ahead of yours.’  So how do you explain to an investor the difference in a best-interest standard of a broker compared to the best-interest standard of an advisor? It’s not going to be easy and will require thoughtful reasoning and practice, shall we say, before the mirror,” Thompson said. 

The only area in which an advisor or broker can elaborate on principles that govern them in Form CRS is where the SEC allows them to provide examples of how they handle conflicts of interest. “Hopefully the conversation starters [the SEC provided in the rule] will lead to frank and candid discussions, but I have a streak of cynicism that tells me Form CRS can be easily circumvented,” Thompson said. 

Should the advisor industry be worried that investors will have a harder time discerning an RIA from a broker after Reg BI?  

“The jury is still out as to whether or not this will alleviate or exacerbate investor confusion, and confusion regarding investment professionals, and the duties they provide and standards they’re under,” said Gail Bernstein, general counsel of the Investment Adviser Association. 

“We’re not all confident yet how the SEC has handled this. To the extent that brokers’ ability to offer advice without registering is broadened, we do worry about what impact this will have on advisors. Advisors will continue to act in their clients’ best interest and provide services as they’ve always done. We hope the result of this rulemaking isn’t to further blur the line in how brokers offer their services,” Bernstein said.

A two-page CRS disclosure may help, but when it’s provided with a stack of other papers, including Form ADV Part 2 and the client agreement, “it’s not clear whether investors will read it or take advantage of the conversation starters,” Thompson said.  “Even then, it will be difficult to pin down an unscrupulous broker or advisor on how they manage conflicts unless the investor has had a negative experience in the past,” he added.

John Anderson, managing director of practice management dolutions for SEI’s Independent Advisor Solutions, said he thinks it remains important that advisors take advantage of the fact that as the dust settles on the SEC rules, it’s still clear that only advisors are fiduciaries. In fact, the agency explicitly declined to make brokers fiduciaries.

“If I were an advisor, I would be marketing the hell out that,” Anderson said. “I would be telling clients, ‘Not only am I fiduciary, but I’m in this for you every step of the way, for the long-term, unlike brokers’ advice which is ‘solely incidental,’” Anderson said, referencing the “solely incidental” interpretation the SEC approved. The new rule broadens brokers’ ability to monitor client accounts without having to register as an RIA.

Technically speaking, this is completely accurate, only advisors are fiduciaries, Thompson said. “But if the SEC can explain in plain English what investment advice of a brokerage firm (outside of discretion) is NOT incidental, then I think it should be nominated for a Nobel Prize in Literature.” 

Added Thompson: “A federal circuit court came down hard on the SEC when it tried to modify the special compensation prong of the exemption in 2007, but it never offered an opinion on the solely incidental prong.  The SEC says a different circuit, in a separate and more recent case, supports its past guidance on solely incidental.  It remains to be seen if it is challenged as part of a lawsuit challenging Reg BI.” 

A band of advisor groups has even created a website -- https://noincidentalinvestors.org -- to highlight the fact that brokers are not held to a fiduciary standard and do not offer ongoing fiduciary advice, only “incidental advice.”        

The website explains the benefits of hiring a fiduciary advisor and has a search engine that helps investors locate several advisors in their area. Knut Rostad, founder and president of the Institute for the Fiduciary Standard, spearheaded the website, along with the Garrett Planning Network, the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network.  

“The Institute has long criticized the idea that “incidental” advice is real fiduciary advice. It patently is not,” Rostad said. “RIAs' “opportunity” is a function of their willingness to speak an unpopular truth. A brokers’ ‘incidental advice’ is akin to a marriage vow’s “incidental” love, honor and fidelity.” 

So does the SEC’s “solely incidental” interpretation give broker-dealers powers they haven't already been exercising?  

“In very practical terms, I don’t think the new guidance will have a big impact on current brokerage practices, but it muddies the waters even more than before,” Thompson said.  

“For monitoring purposes, the SEC appears to have opened the door very wide to allow brokers unlimited monitoring of customer accounts without being required to register, if provided for in the customer agreement,” he added.

Is the industry worried that the SEC has weakened advisor regs themselves, which could further weaken advisors’ marketing differentiation?  

The SEC added a special section in the guidance on this topic but it’s still not clear whether the guidance refers to limiting the scope of services, such as monitoring, or whether the scope of the federal fiduciary duty itself can be partially waived, Thompson said.  

One real concern is the extent to which disclosure serves as the primary remedy for managing conflicts, in the SEC’s rules. In other words, can a fiduciary merely disclose away all his conflicts? “The debate is over the appropriate steps involved in handling conflicts; i.e., is the advisor required first to look at ways to avoid the conflict, or can s/he merely disclose it, ensure that the client is able to make an informed decision, and then proceed with providing conflicted advice?

“If the conflict is substantial, and even though the client understands and accepts the conflicted advice, does the advisor’s fiduciary duty to act in the client’s best interest require him or her to recommend an alternative product or investment strategy?” Thompson asked.  Consumer advocates greatly fear disclosure will be overused and won’t be effective, he added.