by Knut A. Rostad
Last week Michael Kitces wrote that the fiduciary standard is no longer a viable way for RIAs to differentiate themselves from brokers. The reason is the Reg BI standard is nearly the same as RIA’s standard, and grants brokers the right to say they meet a best interest standard and sound like RIAs, according to Michael.
He’s right that Reg BI is the dawning of a new era for independent, fee-only RIAs. Sales talk supported by corporate advertising will claim that brokers now offer a “new and improved” standard that is higher than the RIA standard. BDs are already sending this message. Recall the ad campaign, with Ringo Starr, “This is not your father’s Oldsmobile.”
Yet he’s wrong that Reg BI guts fiduciary advice as a differentiator for independent, fee-only RIAs. In fact, the opposite is true. Independent, fee-only RIAs’ best differentiator is what they do as fiduciaries that brokers can’t. Showing this difference is the challenge.
Reg BI is not what the SEC, BDs and, it appears, Michael say that Reg BI is. Chairman Clayton says the rule “substantially enhances” and Michael says “Really does lift” the broker standard to be “at least very similar” to the standard for RIAs. These comments seem drawn from language describing new duties assigned brokers on disclosure, care, conflicts and compliance.
These sound good, until you dig down. By design Reg BI does not require BDs do specific tasks to lift the standard, except for more disclosure. Also, by design, BDs will write and interpret the new policies and procedures. The SEC seems to suggest in the Reg BI release that a suitability-like standard is just fine.
This means Reg BI is based on the BD’s alignment with issuers or manufacturers to distribute their products to retail customers in three-party transactions, while the Advisers Act fiduciary standard requires fiduciary advice in two-party relationships. These contrasting business relationships reflect the starkly different roles of advisors and brokers and the cultures and business practices that define them. The “three v. two” difference was highlighted in this graphic introduced last year by the Institute.
There seems to be an assumption that the SEC view is the only one in town. It’s not. The views of state securities chiefs, independent experts, tens of thousands of independent fee-only RIAs and investors themselves more accurately describe what fiduciary means. All pretty much disagree with the SEC.
Second, the meaning and historic background of the Advisers Act seems to have been distilled to disclosure. This overlooks the lesson legislators in 1940 took from the crash of 1929 on the need to eliminate conflicts as much as humanly possible. Or that disclosure was (until the past ten years) always deemed a far inferior second choice to eliminating conflicts. Only recently does the SEC reverse its position and rebrand conflicts as inevitable, permissible and even good for investors. This reversal is stunning.
Despite this SEC reversal, investors aren’t buying the idea that conflicts are good. What they want is clarity and transparency in fees and expenses and conflicts (CFA Institute research), and an advisor that works to reduce investment costs and only receives compensation from the client (SEC RAND research). Investors want what independent fee-only RIAs offer. Practices that brokers can’t offer because they’re not allowed to.
Independent, fee-only RIAs, although outnumbered by brokers and part time advisors, are widely available. Several fee-only groups speak out at https://www.advisoronmyside.org. Investors should require an advisor adhere to the Institute for Fiduciary Standard’s Real Fiduciary™ Practices.
Practices are written in plain language and require Real Fiduciary™ Advisors to, among other things: Act as a fiduciary at all times, only accept client fees as compensation, avoid conflicts of interest when possible,mitigate unavoidable conflicts, and explain disclosures and agreements and all-in costs and fees both orally and in writing.
Reg BI, or as financial planner Dan Moisand says, “Reg BS,” is a bad rule for investors. Michael is right that broker-dealers’ advertising will attempt to neuter the term “best interest” and the word “fiduciary” – when alone and not explained. This does not mean that fiduciary duties cannot differentiate RIAs. It does mean language describing fiduciary practices and demonstrating what they mean must be plain, clear, and compelling.
Fiduciary practices differentiate advisors powerfully today because they apply the plain, transparent and concrete actions and straight talk that investors seek (one researcher says are “screaming for”) in an advisory relationship. The challenge is positioning, framing and expressing these practices. This is the “next differentiator” for RIAs.