Last week the Securities and Exchange Commission (SEC) released their long-awaited investment advice reforms, with the main reform centering around Regulation Best Interest (BI), which raises the broker standard above the current requirement of suitability.  What Does SEC Reg BI Mean for Investors?

This new reform emerged from a previous attempt by the Department of Labor to increase the regulation on the financial industry by creating the Department of Labor fiduciary rule. The regulations were ultimately repealed when it was determined that the SEC (rather than Department of Labor) was the appropriate agency to enforce the regulations for the financial planning/wealth management industry. The fiduciary rule applied to retirement accounts (IRAs/401(k)s, etc..) and stated that there could not be a conflict of interest when engaging in advice on retirement accounts. It was a very restrictive regulation and was fought by many firms immediately.

After determining that the SEC was the proper agency to regulate these issues, the SEC Regulation Best Interest is set to begin next year and advisors and firms must be compliant by June 30th, 2020. Unfortunately, in our view, it falls short of requiring brokers and advisors to always put their clients’ interests before their own.

The general assumption is that when you meet with a financial advisor to talk about your future goals and dreams that the advice given to you should be in your “best interest”. After all, the foundation of the relationship is supposed to be built on trust.  Unfortunately, this is not always the case and the incentives are often aligned against you: this can lead to you receiving advice that is suitable, but not in your best interest.

There is a difference between something being suitable versus being in your best interest. Imagine you went to a sporting goods store to buy a pair of hiking shoes for a big trip out west and ran into someone in the shoe department. You ask them to show you their selection of hiking shoes as you share with them your excitement about your upcoming adventure. As they are walking you over to their selection, he or she begins to tell you about this amazing cross-trainer that they just got in; how it is very comfortable, sturdy and looks great. You try it on and it does feel great and sure looks good on your foot. As you purchase this shoe, it is probably suitable for your trip, but was it in your “best interest” for the need that you had? Hiking boots are made for something different than cross-trainers and that should have been discussed with you when making your decision. Now imagine you found out a day later that there was a big contest going on at the store to see who could sell the most new cross-trainers? Many would feel duped.

We are concerned that the new Regulation Best Interest will fall short of serving investors who may not understand this. Instead, advisors and companies will continue to sell “suitable” solutions that benefit their bottom line in place of the “best” solution (see our recent blog on Life Insurance, for example). Ultimately, there can be conflicts of interest when working with an “wealth advisor” or broker and those should be at the very least disclosed, if not eliminated.

At Walkner Condon we operate as fiduciaries in all of our client relationships. We do not accept commissions, referral fees, or any form of compensation that could influence our advice due to a conflict of interest.  Additionally, because I am a Certified Financial Planner or CFP®, I (and the firm) am governed by their code of ethics, which they recently revised their (which I’ll discuss in a future blog post) to increase the standard of care to having a fiduciary duty in all client and business relationships.

Ultimately, the goal of our firm is to ALWAYS put our clients needs before our own when engaging in a contractual financial advisory relationship as we help our clients achieve confidence and clarity for their futures. We wish that Regulation BI moved us closer to a more universal fiduciary standard, but for now, it appears that the regulation will lead to little more than more disclosure documents that are lightly read by investors.

-Jonathon Jordan