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.