The SEC has just passed a new regulation called the “best interest standard.” The title of the rule — and the public self-congratulations — are designed to reassure investors that all brokers are suddenly required to put their clients’ interests ahead of their own. In reality, nothing could be farther from the truth!
The new SEC regulations simply provides an umbrella under which Wall Street firms can hide while continuing to charge unnecessary and high commissions to unsuspecting novices. Whether it’s a retiree wondering what to do about a 401(k) rollover or a first-time investor wondering what to do with an inheritance, the new rules and the new “best interests” standard are designed to lull the client while brokerage firms continue to do business pretty much as usual.
The street is cheering the new SEC “best interests” rule. Yes, there will be a new complex form to fill out when opening an account. In it, the broker is supposed to explain the new standards. But it will likely be treated much like the fine print in an investment prospectus — never read — or like those online disclosures which you must accept before joining a website: Click to accept.
But what the SEC did not require is the true fiduciary standard. That would have required a broker or adviser to do two things: 1) fully disclose all fees, costs, commissions and “incentives” that could motivate the recommendation, and 2) always put the client’s interests ahead of the adviser’s.
Many investment advisers already adhere to the fiduciary standard and will gladly sign that pledge in writing on their letterhead. For example, certified financial planners (CFPs) who are members of NAPFA, the National Association of Personal Financial Advisors) and work on a fee-only basis have always been fiduciaries. (Search for one at NAPFA.org.) It has been a successful business model for both advisers and clients for many years.
Or find a CFP Fiduciary at Wealthramp.org — a matching service that connects you with a select and carefully vetted list of fiduciary planners.
NAPFA issued a statement saying the new SEC rules are misleading and that the “best interest” concept that is not equivalent to a true, robust fiduciary standard.
NAPFA points out that brokers take advantage of a huge loophole in the Investment Advisers Act of 1940: They are exempt from rules covering advisers when they are providing investment advice “solely incidental” to the broker’s “primary business” of effecting securities transactions. In other words, if a broker is selling a product, the “best interests” of the client can go out the window!
The terminology might seem like a technicality, and it is designed to be just that. In fact, it sets up an easy legal defense for brokers who mislead clients by selling costly products and services in which they are richly incented.
My advice to investors remains the same. Ask your adviser, broker, financial planner or “annuity expert” to put the Fiduciary Pledge in writing on their company letterhead:
- I will fully disclose all fees, costs, commissions and incentives.
- I will ALWAYS put your interests ahead of my own or those of my firm.
Only then can you truly be sure that you are getting unbiased advice and products for your largest and most important financial decisions.
As for Wall Street, the only “best interests” this new SEC rule will serve are the brokers’ own. A prosperous free market system requires open access to information, fair rules and a level playing field. It is shortsighted of the financial industry to think it can continue to profit from taking an edge on uninformed investors.
That kind of thinking not only hurts the markets, but the American promise of opportunity for all. And that’s The Savage Truth!