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The SEC’s Reg BI and the CFP Board standards will be enforced June 30. Those rules and standards abandon core principles of the Investment Advisers Act of 1940 that have protected investors for decades. They are a giant leap backwards. The standards also violate plain common sense. Rejecting common sense furthers investor distrust of finance, brokers and advisers.
The American Heritage dictionary defines common sense as, “sound judgment not based on specialized knowledge.” In history, Winston Churchill refers to “good sense” in his oft-quoted words, “to never give in, never, never, never … except to convictions of honor and good sense.”
Common sense performs a vital role, especially when divisiveness and distrust are prevalent. It provides cohesion and confidence.
Common sense is center stage in the coronavirus. Masks, social distancing, no large groups and video meetings are the norm to help contain the virus. No one questions their effectiveness; some question their application.
The new standards abandon three basic commonsense ideas: 1) advisers and brokers differ by design; 2) conflicts should be avoided; and 3) conflicts differences matter.
Investment advisers and broker-dealers fundamentally differ. Yet, the standards don’t say so.
Both standards refute the obvious. Brokers work for and are paid commissions and fees by manufacturers to sell securities to their customers in relationships of three (the client, the broker and the product manufacturer). Advisers work for and are paid by their clients in relationships of two (the client and the adviser). Their roles, purposes and functions differ at a foundational level, just as butchers differ from nutritionists. Yet, both standards, implicitly or explicitly, argue that advisers and brokers are essentially the same.
Conflicts should be avoided if possible. Yet, the standards don’t say so.
Only a few years ago, a senior federal securities regulator compared conflicts with viruses and wrote they are a “mortal threat to the body.” Yet, both standards actually speak approvingly of conflicts. Based on Reg BI, the SEC does not require the “elimination” of any particular conflicts, and worries it could mean “a broker-dealer may not receive compensation for its services.” The CFP Board explicitly rejects NAPFA’s recommendation urging CFPs to avoid conflicts.
Conflicts come in all sizes. Yet, the standards don’t say so.
A review of forms ADV for broker-dealers’ RIAs, such as Ameriprise or Northwest Mutual, provide a glimpse of the massive and myriad of conflicts their customers face. Ameriprise uses 16 pages to explain how it gets paid. Northwest Mutual uses six pages to describe for CFPs its compensation methods. Meanwhile, many RIAs use just a table or paragraph to describe their transparent fees.
Both standards say nothing about how much compensation conflicts differ. The SEC’s form CRS required language implies the opposite – that all conflicts are the same. The same language for advisers and broker-dealers is used, as per the SEC, “The way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations and investment advice we provide you.”
The CFP Board singles out fees of fee-only planners as “particularly acute” conflicts, while staying mum on brokers’ conflicts. It overlooks the substantial, complex and opaque conflicts in brokers’ product recommendations. There is no CFP Board discussion of these conflicts.
Violating common sense is worse.
The standards run roughshod over common sense and abandon Adviser Act principles that have protected investors for decades. Rejecting established legal principles is bad enough. Willfully violating common sense ideas is worse. It creates confusion, undermines confidence and disrespects investors.
Forget the legalese. The reply to these new standards is the common sense ideals that fiduciary advisers apply every day and investors deeply appreciate. Those ideals that inspired independence in 1776. What Churchill proclaimed in 1941 must be defended, “Convictions of honor and good sense.”
Knut A. Rostad, MBA, is the co-founder and president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy.
Read more articles by Knut Rostad
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
