The Advice Industry, Part II

financial planning for attorneys financial planning for entrepreneurs financial planning for retirement financial planning for young professionals Mar 27, 2020

By Glenn J. Downing, MBA, CFP®

A lot has happened in our regulatory world since I posted the original blog piece, The Advice Industry. The DOL rule is void. The SEC is now working on final new rules for standards of client care.  

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 for investment advisers. The SEC made concessions to the brokerage industry, known as the Merrill Lynch rule, and a much lower suitability standard became the norm.  Several years ago the Financial Planning Association (full disclosure:  I am a past president of the Miami Chapter) litigated against this rule, and won.  The essence of the suit was that brokers and registered investment advisers should play on a level playing field.  Meaning that brokers should be held to the same higher standard that I am as a registered investment adviser.  This win in court forced agencies to re-evaluate their regulations.  

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 even 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, 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. Yet I believe the DOL was trying to address 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. At this writing (early 2020) we have no new rule yet. 

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 whenever giving financial advice.  This is a change - it used to be that we were held to a fiduciary standard only when doing financial planning or performing substantial elements thereof. Now, however, we are fiduciaries 24/7.  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.  The SEC is still trying to figure out how to take its toe right up to the fiduciary standard line without actually implement it.  What a shame.  

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