Head to Toe


SEC Best Interest Ruling

I wanted to shed some light on some news that likely passed under most people’s radar, but could have a very large impact in how the financial services industry operates with clients.  The SEC has put forth its “Advice Rule” that seeks to provide standards on how broker dealers and large firms conduct business.  Because of some of the language the SEC is using, it could make it more confusing for those seeking qualified financial advice, so I wanted to quickly break down the new language and give an explanation of what it means.  

From an earlier post about how to choose your financial advisor, I talked about the difference of working with someone with a fiduciary responsibility vs broker dealers who simply have to prove that the recommendation was suitable.  Now, the SEC is trying to put in place a “Best Interest” regulation for broker dealers which sounds as though they now have to operate with your best interests when giving advice or making recommendations.  However, this regulation would only be in effect at the time the recommendations were made, which could cause issues if your situation changes. Another wrinkle is for firms that are registered as both a broker dealer and a Registered Investment Advisor (called hybrid firms) the can switch “hats” at will and can avoid the “Best Interest” obligation.  
The good news about these changes is that now broker dealer firms are required to provide clients with a Disclosure Form which details in plain language what the relationship is between the client and the firm.  This will hopefully allow clients to see exactly where they stand and what they’re paying that they may not have seen initially, but the language of this disclosure is likely to be a hotly contested issue given that most firms would not disclose how they make money off of you.  Hopefully this new regulation will help to tighten some of the regulations on broker dealers and allow clients to have a better understanding of what they’re getting into, but given that hybrid firms can skirt these regulations simply by shifting from type of firm to the other, it makes me wonder if all the SEC has done is to make it worthwhile for broker dealers to simply open corporate RIA’s so they too can avoid regulations.  If you have questions or want more clarification, comment or contact me and we can go into greater detail.

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