There is no doubt that the Securities and Exchange Commission’s new package of “best interest” proposals seems like a huge win for B-D associations, including the Financial Services Institute (FSI) and the Securities Industry and Financial Markets Association (Sifma).
On the heels of handily defeating the DOL fiduciary proposal on court appeal in March, the industry's lobbying has no doubt found its mark in round one of the SEC’s proposed rulemaking. As critics, including three SEC commissioners, have pointed out, the agency’s proposed “Regulation Best Interest” surprisingly fails to even define an investor’s "best interest," let alone institute a fiduciary requirement on broker-dealers.
But—and it’s a huge but—what the SEC’s nearly 1,000 pages of new proposals does accomplish is clear: They require B-Ds to make clear to the investing public that their brokers are salespeople who do not offer continuing advice or account maintenance and are not trusted fiduciary advisors. In fact, a broker will no longer even be able to pose as an investor’ trusted “advisor” or “adviser” since the SEC’s new proposals prohibit them from using either word as a title.
While B-Ds and wirehouses may like the fact that they don’t have to transform all of their brokers into fiduciary advisors overnight, it doesn’t mean they might not like to, say, in a year or so.
That’s because firms are steadily making their way into the advisor space, preferring the profitability of recurring fees and practices that better align their interests with their retail clients to the one-off commission sales of the traditional broker-dealer model.
“We see the continuation of a great conversion among what used to be the broker-dealer and advisor models and I think the SEC proposals will continue to spur that,” said Rob Cirrotti, managing director and head of retirement and investment solutions for Pershing.
“The challenge for firms that have grown up on the broker-dealer side of the equation is, can they shed the baggage of their traditional biz model in a rapid enough pace to transition to the advisor-centric biz model of the future? I like to say that advisory model is more centric to the B-D model than the B-D model is to the B-D model at this point,” Cirrotti added.
Attorneys who work with broker-dealers see the migration too. Drinker Biddle partner Fred Reisch said he has heard from a number of firms’ executives who instituted fiduciary policies as a result of the DOL’s fiduciary rule who said “they are not going back to the non-fiduciary model. They have new systems and approaches they’ve developed internally and they like some of them and are going to keep them in place” whether or not the DOL decides to appeal the court decision that vacated its rule at the end of April, he said.
“I think a lot of it is here to stay and all three regulators are converging in terms of sales rules,” Reisch added. “I think the trend toward level fee investment advice will continue. Advised accounts will continue to grow. Transaction-based accounts will still be there for investors who prefer to do it themselves and for smaller accounts.”
Also spurring the transition to advice?: The fact that now the SEC will, for the first time ever, be much more involved in the sales practices of brokers. The perceived benefits of being solely Finra-regulated as a B-D are swiftly dwindling. More than one wirehouse and B-D executive across the country is now wondering what real regulatory benefits they get from retaining a brokerage model that is less profitability and catering to a shrinking market for commissioned-sales products, but with an increased regulatory burden.