The Advice Industry Part II
A lot has happened in our regulatory world since I posted the original blog piece. The DOL rule is void. The SEC is opening up a public comment period about its new standards of client care.
See related: The Advice Industry, Part I
The government regulates this industry – investments, advice, and insurance – via the Securities and Exchange Commission (the original 1940 Investment Advisers Act), the Department of Labor (ERISA comes under DOL, or the Employee Retirement Income Security Act), and the insurance commissioners of the 50 states. Just as it takes a team to give a client comprehensive advice (financial planner, investment adviser, estate attorney, accountant, and maybe more), apparently it takes a team of government agencies to regulate all of us in the industry to their satisfaction.
The Now-Dead DOL Rule
The 1940 SEC Act requires a fiduciary standard of client care. As I noted in Part I, The SEC granted exceptions to the brokerage industry, and a much lower suitability standard became the norm. A few years ago the Obama Department of Labor got into the game, and enacted its now dead DOL rule. It required . . . wait for it . . . people giving investment advice to client retirement accounts to act in their client’s best interests. What a concept! But it brought along with it an enormous regulatory and compliance burden.
The underlying assumption is that any sales situation creates a conflict of interest with the client. Which it does. If I want to sell you a security, a policy, or a suit – I have a conflict of interest with you. How do you really know that the suit looks great or that you need that stock in your portfolio? You don’t – unless you are of equal training and experience as the person making the recommendation. To deal with the conflict of interest, the DOL initiated a whole host of rules, the most (in)famous of them being the best interest contract exception (BICE). In this circumstance a client signed a statement to the effect that he understood he was paying a fee for advice, that there was a conflict of interest in the way that the adviser would be paid, but nevertheless he would hold the adviser harmless.
The rule was open to the public for comments for an extended period of time. The insurance and brokerage worlds hated it. Apparently they saw too big a risk of the rule killing business. Nevertheless, the DOL phased in part of the law. However, just recently the 5th Circuit Court of Appeals has ruled the DOL rule void.
The SEC Replacement
The DOL rule was, I believe, misplaced, in that it came out of the wrong Federal Agency. DOL enforces ERISA. Fiduciary standards are SEC territory, not DOL. One could make the argument that the DOL was acting in a vacuum created by the SEC’s inaction.
Consequently, the SEC has been working hard to come up with a replacement. Although the proposals I’ve seen so far fall far short of a full fiduciary standard, they are a little stronger than the current suitability standard. The public comment period is about to open up, and by early 2019 we may have a new rule.
From what I’ve seen so far, the most interesting part of the proposal is to limit who can call himself or herself an adviser (or advisor). Those who practice with a fiduciary standard will be called advisers, and everyone else will have to come up with a new term.
Our point of view is that we are in favor of anything that advances a broad fiduciary standard of care in the investment and financial advice industry. As CFP® professionals, we are already there in that standard. As a Registered Investment Advisory firm, we are already there in that standard. But does the public at large perceive what the differences in client care really mean? Probably not.
The CFP® Board’s New Standard
Meanwhile, the CFP® Board itself has, after a period of public comment, strengthened its own rules for CFP® certificants. The standard is currently a fiduciary one – meaning the client’s best interests first and always. But not always! only when doing financial planning or performing substantial elements thereof. Our new rule goes into effect in October of next year. At that point we’ll have a 24/7 fiduciary standard whenever giving financial advice. About time.
Bottom line: you can always expect unbiased financial advice, in your best interests, with any conflicts of interest fully disclosed, when you work with a CFP® professional.
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