Opinion: New rules for financial advisers protect Wall Street — not you

Published: June 13, 2019 11:24 a.m. ET

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Everyday investors are the biggest target out there for unscrupulous financial firms

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Is your adviser working for you?
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By

MitchTuchman

“Self-regulation” is the worst kind of oxymoron. Letting the energy industry write pollution laws and food producers write sanitary rules is just nonsense.

Only in Washington would that be called “efficient.”

The technical term for this problem is regulatory capture, a fancy way of saying the true cop on the beat has been sent home for the night. That’s what we just got from the U.S. Securities and Exchange Commission (SEC), the supposed regulator of Wall Street, on financial adviser behavior.

A few years back, the Labor Department tried hard to create what’s called a fiduciary standard for retirement financial advisers. Not all advisers, just those helping normal people make their savings grow until they’re old and need income.

My colleague Scott Puritz testified eloquently before the Senate in favor of the fiduciary rule at the time. In simple terms, the rule required financial advisers who oversee retirement investments to put their client’s interests first, ahead of their own.

The Labor Department was perfectly suited to the job. After all, this is the agency that enforces the Employee Retirement Income Security Act of 1974, known as ERISA, along with the U.S. Treasury and the Pension Benefit Guaranty Corporation.

Missing from this list, you might notice, is the SEC. A turf war erupted, then the incoming Trump administration canned the fiduciary rule at the 11th hour.

What followed was two years of struggle at the SEC to create a policy that looks like a fiduciary rule while simultaneously keeping Wall Street fat and happy. Regulatory capture at work.

Toxic conflicts

The result is something called “Regulation Best Interest” or Reg BI. I’ll quote the Consumer Federation of America’s Barbara Roper directly here:

“The SEC is throwing ‘Mr. and Ms. 401(k)’ under the bus,” Roper says.

“These new rules seriously erode the Commission’s traditional interpretation of the Advisers Act fiduciary standard, giving brokers virtually unlimited ability to act as advisers, while simultaneously failing to regulate them accordingly, and making it easier for brokers to mislead their customers into believing they are getting trusted, best interest advice when they are actually getting investing recommendations biased by toxic conflicts of interest.”

Here are some takeaways from the CFA:

Claim: The SEC says that Reg BI requires advisers to act in the best interest of clients, rather than simply the weaker “suitability” standard.

Reality: Rules in place at the Wall Street-run regulator FINRA already state this. Reg BI changes nothing.

Claim: Reg BI means advisers must put their client’s interest ahead of their own.

Reality: The regulation doesn’t require this at all. So long as conflicts are disclosed and some lighter requirements are met the adviser can sell virtually anything he wants, even if they serve his interests before those of the client.

Claim: Reg BI provides conflict-of-interest mitigation procedures.

Reality: Those procedures are up to the adviser’s firm, and they can do pretty much whatever they want here, as before. Firms can incentivize advisers and conflicts can be managed to benefit the adviser and the firm, rather than the client.

Claim: Reg BI requires disclosure of lower-cost investment options.

Reality: Only in the case of different share classes of an identical security. Across securities, advisers are free to recommend whatever they want, even if they get a kickback for doing so.

Claim: Under the law, the SEC only needs to require disclosure.

Reality: The Dodd-Frank Act gives the SEC real teeth to require a true fiduciary duty from financial advisers. It simply chooses not to.

And the list goes on. Look, it’s not surprising that Wall Street wants less regulation of its behavior toward retirement investment customers. The mass of unsophisticated, everyday retail investors is the biggest target out there for unscrupulous financial firms. Just do an online search for “Wells Fargo” over the past few years and you’ll see exactly what I’m talking about.

The financial advice industry has a huge credibility problem, and it just snookered the American public by capturing the SEC and making up rules that seem tough but change nothing about how many financial advisers make money.

Real advice

The turmoil is just beginning. You would expect folks like me on the fiduciary side of the argument to be upset, but there’s a real divide forming among financial advisers at large, as Roper herself points out on Twitter.

The Certified Financial Planner Board of Standards is up in arms about the SEC announcement. You wouldn’t know it from their statement on the matter, but they’re just being polite, in my view:

“Now that the SEC has issued its Regulation Best Interest rule and related guidance for investment advisers, consumers should know that nearly 85,000 CFP professionals will be obligated to provide financial advice under a fiduciary standard.

“The fiduciary obligation in CFP Board’s new Code of Ethics and Standards of Conduct (effective October 1, 2019) is straightforward. Drawn from the common law of fiduciaries, it includes a duty of loyalty to place the clients’ interest above their own and the firm’s, a duty of care, and a duty to follow client instructions. This clear and simple standard — along with the entire Code and Standards — is consistent with CFP Board’s mission to benefit the public.

“Professional standards-setting organizations, such as CFP Board, exist in part to set standards that go beyond those required by the law for the benefit of the public and the profession. Those who comply with CFP Board’s Code and Standards will not be in violation of Regulation BI, or any other existing laws and regulations, by doing so. The new Code and Standards complement, rather than conflict, with the law.”

Let me translate here, if I may: “Reg BI is not a fiduciary standard. Our members must continue to meet the higher standard as we set it.”

A slew of stock brokerages tried to slow the Certified Financial Planner Board from setting a higher standard. It’s coming anyway. Now loads of advisers who work at places such as Ameriprise AMP, -0.31%, Morgan Stanley MS, -1.15%  and Edward Jones likely will have to choose between doing their jobs the way their boss wants or using their hard-won personal CFP designation. They’re in a tough spot for sure.

I have a simple suggestion: Leave the dark side. Try real fiduciary financial advising. You will have to make money by providing actual advice instead of selling products, but you’ll be happier and so will your clients.

Mitch Tuchman brings the low-cost, scientific investment approach used by elite pensions and endowments to everyday retirement investors through Rebalance. The firm manages retirement accounts with portfolios built by its Investment Advisory Board: Burt Malkiel (Princeton professor who wrote “A Random Walk Down Wall Street”), Charles Ellis (past chair of Yale’s Endowment) and Jay Vivian (ran IBM’s retirement funds). Follow Mitch on Twitter @MitchellTuchman.

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