“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?