Nerd's Eye View blog

Weekend Reading for Financial Planners (August 11-12)

August 10, 2018 02:51 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the IRS has issued new regulations to provide additional guidance on the Section 199A "pass-through business deduction", with a particular focus on cracking down on professional services firms (which includes financial advisory firms) to prevent them from abusing potential "loopholes", like cracking up their businesses into pieces that might have been eligible for the deduction.

Also in the news this week is a discussion that RIA custodians are considering whether to adopt a new pricing model of offering custody services for a basis point charge, rather than just trying to make money on the underlying products that clients implement... in what would be a very positive realignment of the costs that advisors and their clients pay with the value that custodians provide, but could be challenging to transition to the currently-less-transparent "free" model of custody for advisors.

From there, we have several retirement-related articles this week, including research on the kinds of words and images that consumers use to describe retirement (which importantly but not surprisingly varies depending on their own demographics and background), tips to prevent loneliness in retirement for new retirees who often unwittingly become very socially isolated, why more and more retirees are looking for "phased retirement" approaches that blend part-time work with retirement, and the real-world difficulties that many older workers are facing in actually finding meaningful part-time work in retirement.

We also have a few practice management articles, from a fascinating study about what next generation advisors really want in a financial planning job (with 78% wanting to do comprehensive financial planning, but only 2% showing interest in sales and marketing!), how to speed up training for next generation advisors by becoming a more effective mentor, and the rising demand of next generation advisors for family leave policies given that more and more are launching their financial planning careers while also starting a family.

We wrap up with three interesting articles, all around the value of reading itself to advance our knowledge and skills: the first explores the physiology of the brain and how reading literally helps the brain form new connections that can improve our fluid intelligence and ability to spot important patterns; the second looks at the important balance between both book knowledge and real-world knowledge (as book knowledge alone misses real-world applications, but real-world knowledge alone misses important patterns and opportunities that aren't necessarily intuitive); and the last is a series of four "summer reading" book suggestions on the leading industry books that are most relevant to financial advisors today.

Enjoy the "light" reading!

Why CPAs Are A Growing Competitive Threat to Financial Advisors

August 9, 2018 02:40 pm 0 Comments CATEGORY: Planning Profession

Over the past few years, advisors have worried mightily about the threat posed by the rise of the so-called robo-advisors. However, as we’ve seen in recent months, several robo-advisors have shut down, while many of the more prominent ones have seen their growth rates decline dramatically. Still there is a threat out there that financial advisors need to be aware of: and it’s not from robo-advisors, but from Certified Public Accountants (and what robo-tax-preparation has done to them!).

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope and guest hosted this week by Jeff Levine, we discuss why CPAs represent the biggest competitive threat to financial advisors today, why the demise of the DoL fiduciary rule has opened the door for CPAs to expand their practices by offering financial planning services, and the steps financial advisors can take right now to help stave off that threat.

It’s not news that financial advisors have been dealing with compressed margins for years, but CPAs have been under that same pressure for far longer, as “robo” tax preparation software has dramatically reduced tax preparation costs for consumers. By expanding into financial planning services, CPAs have the opportunity to add value for their clients by capitalizing on the fact that, not only do they already have a deep knowledge of their clients’ financial situations, but they also enjoy a very high level of public trust.

All of this, including the fact that consumers prefer one-stop shopping, makes financial planning a great fit for CPAs. The American Institute of Certified Public Accountants (AICPA) knows this as well and has been busy promoting their Personal Financial Services (PFS) designation, which (by the way) is only available to CPAs. And now, with the Department of Labor's fiduciary rule now officially out of the picture, a major regulatory hurdle is out of the way, opening the door for larger accounting firms to take a closer look at entering the wealth management arena.

All is not lost, however. To combat this threat, financial advisors can focus on developing their tax planning expertise, and work on making themselves indispensable to tax professionals by proactively sharing and providing client information and collaborating with as early as possible every tax season. Because CPAs who already work productively with financial advisors are less likely to decide to go into competition with them… especially if the CPA is counting on you as their referral source!

The bottom line, though, is simply that CPAs represent a threat to financial advisors, as they are driven increasingly towards the advice business because of the pressure on their own accounting firms… but there’s still an opportunity for advisors to create stronger professional relationships with accountants and even grow their practices in the process.

RUFADAA And The Importance of Digital Estate Planning

August 8, 2018 11:57 am 2 Comments CATEGORY: Estate Planning

Over the past several years, the rise of the Federal estate tax exemption has dramatically reduced the scope of “traditional” estate planning, which is less about estate tax planning now and more about simply ensuring that the right legal documents are in place to specify how various assets should be disposed of, and who is responsible for doing so.

Yet at the same time, the rise of the digital world has created a new wrinkle for estate planning: how to transition “digital” assets. Which is important not only for those digital assets that can carry a monetary value (such as cryptocurrencies, domains, websites, etc.), or login credentials to such sites (e.g., usernames and passwords to bank and investment accounts), but also social media profiles and actual media files (e.g., digital photos). As once the account owner passes away (or is merely incapacitated), the heirs may have difficulty finding and accessing those digital assets after the fact.

While it might seem simple enough to solve the problem by just keeping a list of account credentials “in a safe place” for someone to use “just in case”, the fact that they might have the information to access to the accounts doesn’t necessarily mean that they have the legal authority to do so, especially when a website’s Terms of Service do not permit a transfer of ownership. In fact, heirs could potentially be found guilty of “hacking” by trying to access a loved one’s online accounts after he/she is gone… even if it was the individual’s dying (but not legally binding) wish!

To address the situation, various legal measures have been proposed in recent years, including the Uniform Fiduciary Access to Digital Assets Act (UFADAA), and the Privacy Expectation Afterlife and Choices (PEAC) Act. But after various implementation struggles, the Uniform Law Commission ultimately created the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) in 2015, which received widespread support and in just a few years has been adopted by more than 40 states.

RUFADAA gives a clear hierarchy of instructions for how a person’s digital assets are to be treated should a fiduciary seek access, which may include not only executors after death, but trustees, court-appointed guardians, and attorneys-in-fact. The starting point is that online service providers can create an “online tool” that functions as a form of “digital power of attorney” to specify who has control and access for that specific site. In addition, RUFADAA provides a clear legal framework for digital asset rights to be specified in traditional legal documents (e.g., Wills and powers of attorney). And clarifies that it’s only in the absence of an online tool, or any legal documents, that finally the service provider’s own Terms of Service will control.

Ultimately, the importance of estate planning has always been about ensuring that assets are distributed in the desired manner after death, and identifying the individual(s) responsible for doing so. But the complications of digital estate planning are unique, not only because of the complexities of bequeathing “digital” assets, but also because most individuals accumulate so many online accounts it may be difficult to even know where all the digital assets are! Fortunately, though, that means there’s a valuable role for the financial advisor to play in helping clients to ensure their digital estate plan is in order. Starting with helping clients at the next meeting understand the value of using a secure password manager, not only for the benefits of cybersecurity, but because it can form the core of the digital asset inventory they’ll want to begin the digital estate planning process!

#FASuccess Ep 084: Re-Energizing After A Mid-Career Crisis With A Focus On Next-Generation Talent Development With Diane Compardo

August 7, 2018 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 84th episode of the Financial Advisor Success podcast!

This week's guest is Diane Compardo. Diane is a partner and team leader at the Moneta Group, an independent RIA with nearly $20 billion of assets under advisement and 40 partners, in which Diane leads a 16-person team with 4 partners and $1.4 billion of AUA, and has served as the chair of their Governance Committee as well.

What's unique about Diane, though, is that after nearly 20 years of building an incredibly successful advisory practice working with corporate executives at Moneta, she decided to substantially increase the size of her team and shift her own focus towards building and developing new advisors and partners at the firm... not just to grow the business, but as a way to reenergize herself after a proverbial mid-career crisis.

In this episode, we talk in depth about the unique Moneta Group structure that provides shared centralized administrative compliance and support services for more than 20 independent teams of advisors affiliated with the firm, how the firm structures its compensation and revenue-sharing agreements with teams, the unique partnership structure of the firm based on their relative contribution of profits to the firm, and how Moneta evolved into creating a governance board that sets strategy for the firm but is separate from the management team that runs the day-to-day business.

We also talk about how Diane's own niche in working for corporate executives evolved. How she first created a specialization in working with them during her early days as a CPA at Price Waterhouse, working long hours and cramming 10 years of experience into just 5 years, why she ultimately left PwC to join Moneta and forge her own pathway to partnership, and how Diane structures her team meetings today with clients both as a way to improve client service and also to develop new advisors themselves.

And be certain to listen to the end, where Diane talks about how she uses checklists in her calendar to balance her time between work and personal life, the support system she's created for herself by getting involved in local networking groups like the Women Presidents' Organization, and how she reenergized herself from the low point of her career with the strategic and deliberate shift in how she was spending her own time in the business.

So whether you are interested in hearing about Moneta Group's unique partnership structure, how a mid-career crisis re-energized Diane and helped her to focus on developing next-gen talent, or the strategies she's used to build a strong network, then I hope you enjoy this episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (August 2018)

August 6, 2018 07:03 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the August 2018 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the big news that, after years of warning that robo-advisor growth rates were slowing and seeing many high-profile robo-advisors pivot to become B2B solutions for advisors… some of them are beginning to outright shut down, with early (founded in 2009) robo-advisor Hedgeable withdrawing its investment adviser registration to manage portfolios as its founders move on to new blockchain endeavors, and WorthFM permanently terminating, as its related DailyWorth media site is sold (without the WorthFM robo-advisor attached) to personal finance media personality Jean Chatzky.

From there, the latest highlights also include a number of interesting advisor technology announcements, including:

Notwithstanding guidance that it’s permissible for clients to leave reviews for advisors on Yelp, the SEC cracks down and fines several advisors (and their marketing consultant) for asking clients to leave reviews as a deemed testimonial solicitation.
Advisor FinTech competitions heat up, as XY Planning Network announces its FinTech competition finalists, TD Ameritrade launches a new FinTech competition with $100,000 in prizes, and Scratchworks funds its first FinTech competition winner InvestmentPOD.
Large-firm enterprise interest in technology to support advisor efficiency hits a fevered pace, as Merrill Lynch rolls out a massive Fiduciary Dashboard for its advisors and Ameriprise announces a 10,000-advisor deal to switch from Ebix to Salesforce CRM.
MaxMyInterest announces a deal with Dynasty Financial as “cash management” becomes a new value-add service from advisors to their clients.

Read the analysis about these announcements in this month's column and a discussion of more trends in advisor technology, including Wealthfront launching a new financial planning module in Path that helps working clients understand the implications of taking a sabbatical or time off to travel (which is significant not only for the technology itself, which no other advisor software can do effectively, but the fact that its Millennial clients may not engage with saving for retirement in the “traditional” way), a new report from the Treasury Department laying out the Trump administration’s FinTech regulatory guidelines that would include a streamlined process for firms to more easily get the licenses and permits they need to operate and innovate, and a look at the second (next) generation of estate planning software beginning to emerge, as estate taxes move to the background but getting basic (but not always simple) estate planning documents in place takes on a relatively greater focus.

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map”, including a number of new companies and categories!

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (August 4-5)

August 3, 2018 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that Fidelity has launched an entirely free index mutual fund, with an outright expense ratio of 0.0%, in what financially is only a modest decrease in cost from the near-zero expense ratios of many index funds already, but represents a major shift in the industry as asset managers officially begin to focus on generating revenue beyond "just" their investment products alone. Also in the news this week was an announcement that the Trump administration is considering a proposal that would index cost basis to inflation over time, effectively applying capital gains on only "real" gains (above inflation), in what would potentially be a game-changer for the relative value of taxable accounts over tax-preferenced retirement accounts (that would have no such basis adjustment).

Also in the news this week were a number of major industry announcements, including that the CFP Board will be launching a series of public forums over the next 18 months to train CFP professionals on the new Standards of Conduct (and gather feedback on where the Standards Resource Commission should issue additional guidance), the Financial Planning Association announces a newly updated "Primary Aim" for the organization with an increased focus on advocacy for the profession, and the latest FA Insight study shows that advisory firms continue to enjoy strong growth in the midst of an ongoing bull market but that profit margins continue to decline (now to an average of just 20%) as pressure rises on firms to reinvest in their value proposition to justify their fees (which are now also beginning to show signs of competition and compression).

From there, we have a number of regulatory articles, including a surprising SEC action against Schwab Advisor Services that may put newfound pressure on RIA custodians to have a more active role policing the RIAs that use their services (particularly with respect to anti-money laundering regulations), some new guidance from the SEC on what constitutes 'inadvertent' custody for which the RIA will not be punished for failing to adhere to the Custody Rule, legal risks to consider for advisors who are publishing content (e.g., blogs or newsletters) and don't want to get in trouble for plagiarism or copyright violations, and a look at just how far the CFP Board's fiduciary regulations have come in the past 11 years (and where they may go from here).

We wrap up with three interesting articles, all around the role and value of financial advisors in the eyes of consumers: the first is a fascinating look at what leads consumers to switch financial advisors, finding that changes in personal or financial circumstances (from divorce or marriage to significant increases in income or net worth) are most likely to cause a consumer to switch advisors (despite the fact those are often the "money in motion" triggers that cause clients to become more profitable for their existing advisor!); the second looks at how financial planning as a profession has evolved over the past 45 years since the first class of CFP certificants in 1973; and the last looks at new research on the value of financial designations themselves, finding that consumers with higher incomes and investable assets really do tend to pay more to advisors who have such professional designations!

Enjoy the "light" reading!

Satisfying The CFP Board Experience Requirement As A Part-Time Career Changer

August 2, 2018 02:03 pm 0 Comments CATEGORY: Personal/Career Development

With the average age of a financial advisor estimated to be 50-something, a looming talent shortage has made it increasingly appealing to become a financial advisor… both as a prospective career for college students, and career-changers looking to switch into a more financially lucrative and psychologically rewarding career. The caveat, however, is that as CFP certification increasingly becomes the requisite pathway to a professional career as a financial planner, the CFP Board’s experience requirement is proving to be especially troublesome and challenging for career-changers who can’t necessary jump in with both feet at once and must make a more gradual transition.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why the 3-year experience requirement is especially challenging for career-changers pursuing CFP certification, the ways that career-changers can satisfy their experience requirement, and the changes that the CFP Board itself should consider to be more accommodating to the realities of career-changers in the future.

Historically, most financial advisors started their careers as a 20-something that received training to sell their company’s products, and over time moved up into more comprehensive financial advice. The “good” news of this sales-centric pathway was that in the early years that are often lean, advisors were early in their own careers and usually didn’t have many family or income constraints. In other words, it was economically more practical to take the risk. By contrast, though, for those who are mid-career and want to transition into a full-time planning career, it might not be so financially feasible to make an abrupt change. Instead, career-changers more commonly make a gradual shift into the financial services industry, and may only devote a couple days each week to gaining the requisite experience. Yet unfortunately, in that scenario, it can take 5-10 years or more to fulfill the CFP Board’s three-year (6,000-hour) experience requirement, a few hours per week at a time. With the added complication that once a career-changer sits for the CFP exam, the experience doesn’t even count more than five years after passing the exam!

Fortunately, several years ago the CFP Board expanded the ways that the CFP experience requirement can be satisfied, allowing a wide range of “indirect support of financial planning” jobs to count, including working in employee benefits administration or even compliance. And while from the industry perspective, this is concerning – as it means people who have never actually advised anyone nor ever even sat across from a single client can still tick off the experience requirement – from the career-changer perspective, this becomes an especially appealing pathway to finish the CFP experience requirement in lieu of slowly “counting the hours” doing part-time work.

Accordingly, for career-changers who are struggling to fulfill their experience requirement, the best option is usually to look for opportunities in the industry to provide “indirect support” (rather than as a financial advisor salesperson out of the gate, which has a high risk of failure), as even if it’s a role in operations or project management, if it’s in an advisory firm (or the industry more broadly) it should still count. Alternatively, for those who do plan to – or need to – transition more slowly, be cognizant of when you’re going to take the CFP exam, given that you only have 5 years after you pass the exam to fulfill the experience requirement. And bear in mind it’s also possible to beef up your CFP experience hours by volunteering to do pro-bono financial planning work (including structured programs like the IRS’ Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs, or by taking advantage of the FPA residency program to get 3 months of CFP experience in just one week!

In the meantime, hopefully the CFP Board itself will re-think how their policies adversely impact part-time career-changers, with an experience path that isn’t built for the financial realities of career changers who can’t necessarily take a full-time (often entry-level) job out of the gate. Especially since the reality is that even “full-time” financial advisor jobs from the start are often 80%+ prospecting and sales, and less than 20% financial planning anyway… which means part-time career-changers may still be getting just as much real financial planning experience as a new financial advisor trainee anyway!

The bottom line, though, is simply to recognize that there are pathways for career-changers to gain experience, but those who have the most financial flexibility to take potentially-lower-paying-jobs to accelerate their experience progress will have the most options. Which is appealing for those who are able to do so. And hopefully the CFP Board will consider expanding these pathways further over time, so the available career path options aren’t so limited for those who aren’t able to take a step back financially just to make the transition!

How Small Business Owners Overvalue 401(k) Plan Tax Deferral

August 1, 2018 07:46 am 0 Comments CATEGORY: Retirement Planning

The allure of starting a small business employer retirement plan is easy to understand. Not only can business owners provide a benefit to their employees by giving them a means to save for retirement in a tax-deferred account and by making contributions to those accounts, but a 401(k) plan with profit sharing also gives the employer (i.e., founders/owners) a way to save more for their own retirements on a tax-preferenced basis, reducing their tax exposure in the process. In fact, it’s not uncommon to see founders saving more in taxes than it “costs” them in employee contributions!

As compelling as that might seem however, the caveat is that the upfront tax savings of making 401(k) salary deferral and profit-sharing contributions for owners isn’t actually tax savings for them. Instead, it’s merely tax deferral, as those pre-tax contributions will eventually be taxable when distributed. Which is important, because the cash outlays made on behalf of the employees actually are a permanent expense that the owners will never be able to recapture!

The net result is that in the long run, it’s often financially better for business owners to skip the small business retirement plan – even with the tax savings – and simply pay their own taxes and save the net proceeds instead. The business owners may lose out on the upfront tax deduction on the contribution, but by avoiding employee contributions they otherwise didn’t need to make for compensation purposes, the net value is often still higher… especially for taxable accounts that are managed reasonable tax-efficiently to take advantage of the available 15% long-term capital gains and qualified dividend rates.

Of course, the less tax-efficient the investment account will otherwise be, and the higher the percentage of contributions that can be skewed to owners – especially by leveraging the rules permitting some disparity in contributions, such as age-weighted or cross-tested profit-sharing plans – the more compelling the 401(k) plan may become. Still, though, even situations where as much as 90% of all dollars accrue to the owners, who in turn are saving taxes at a 32% marginal tax rate, may still need as much as 20+ years to “recover” the hard cost of employee contributions with the long-term (and very slow) benefits of tax-deferred compounding growth. Which ironically means even salary-deferral-only plans that just require a safe harbor contribution to avoid running afoul of the ACP discrimination tests may still not actually be worthwhile in the long run, compared to just contributing to an IRA (and saving any excess in a normal taxable account).

For small business owners who need to compensate employees more in the form of retirement plan contributions, need to offer an employer retirement plan simply to compete for talent, and/or who may be able to recover most or all of the employee contributions by attaching a vesting schedule (knowing that employees are likely to turn over), the small business retirement plan may still be compelling or an outright necessity. Nonetheless, small business owners should be cautious to recognize that “just” saving on taxes in exchange for making employee contributions is not necessarily as appealing in the long run as it may appear at first… once the fact that 401(k) tax deductions are merely tax deferral, and not real tax savings, in the first place.

#FA Success Ep 083: Switching To The Right Independent Broker-Dealer By Understanding Its Profit Centers With Jon Henschen

July 31, 2018 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 83rd episode of the Financial Advisor Success podcast!

This week's guest is Jon Henschen. Jon is the president of Henschen & Associates, a recruiting firm that specializes in helping advisors find and match themselves to the right independent broker-dealer when making a switch to a new platform.

What's unique about Jon, though, is his willingness to be transparent in how broker-dealer recruiting really works in a segment of the industry that historically has thrived by keeping much of its compensation hidden with back-end commissions and markups.

In this episode, we talk in depth about the key factors to consider when evaluating a prospective independent broker-dealer. Why the ownership structure and whether the BD is publicly-owned or privately-owned and whether the private owner is an individual or a bank or an insurance company or a private equity firm is so important, the ways that certain broker-dealers specialize in certain types of reps, how forgivable loans work when advisors are recruited to a new independent broker-dealer, and the ways that broker-dealers have created profit centers above and beyond the payout grid, which is crucial for advisors to know so they don't unwittingly switch to a broker-dealer that may drive higher pass-through costs to their clients.

We also talk about how the independent broker-dealer recruiting model itself works. How recruiters are paid by broker-dealers to find new advisors to switch to them, what broker-dealers really spend upfront in order to attract advisors to make the switch, and how the dynamics differ when being recruited to a larger versus smaller independent broker-dealer.

And be certain to listen to the end, where Jon talks about the trends in independent broker-dealers that advisors should know when considering where to build their businesses in the long run. How the growth of the RIA channel and the fee-based business is impacting the broker-dealer model, and how different broker-dealers are taking very different positions on whether or how to support hybrid RIAs.

So whether you are interested in hearing about the various ways in which broker-dealers make money, how their recruiting process works, the most important things to consider when evaluating a prospective broker-dealer, or what changes may be coming down the pike for the industry in the coming years, then I hope you enjoy this episode of the Financial Advisor Success podcast!

Public Comment Letter on the SEC Advice Rule and Separating Advice from Sales

July 30, 2018 07:03 am 0 Comments CATEGORY: Regulation & Compliance

Earlier this year, the SEC proposed its own long-awaited overhaul of the regulation of broker-dealers and investment advisers. At the time, the Department of Labor’s fiduciary rule was still the law of the land, and the pressure was on the SEC to “harmonize” – both the SEC’s regulation with the DoL’s version, and to close what has long been perceived as a concerning gap in the standards of conduct that apply to the “suitable” advice delivered by brokers versus the “fiduciary” advice of (registered) investment advisers.

And while the DoL fiduciary rule has since been struck down, consideration of the SEC’s advice rule is still, thus far, proceeding as planned, with a controversial overhaul of the standards of conduct for broker-dealers that would require them to act in the “best interests” of their customers when making a recommendation (but not as a fiduciary at all times in their relationship with clients) under the new Regulation Best Interest, along with a new Form CRS (Customer/Client Relationship Summary) to better describe the nature of the broker or investment adviser’s relationship with the consumer, and a potential limitation on the use of the “financial advisor” title by at least the brokers at standalone broker-dealers who have no RIA affiliation.

Yet, while the SEC’s efforts to lift the standards of advice being delivered by brokers is laudable, arguably its effort to do so by applying Regulation Best Interest to the “pay as you go” episodic or transaction advice of brokers inappropriately redefines the Investment Advisers Act of 1940 itself… which knowingly subjected broker-dealers to a lower standard than that of investment advisers specifically because brokers are not supposed to be in the business of advice (ongoing or episodic) in the first place, and were only permitted to provide advice to the extent that advice was/is “solely incidental” to the sale of brokerage products and services. In other words, the problem is not that broker-dealers are giving advice without being subject to a fiduciary standard under FINRA regulation; the problem is that broker-dealers giving such advice are required to register as investment advisers, and if they did, they would already subject them to the fiduciary standard that applies to registered investment advisers, rendering the entire Regulation Best Interest proposal moot anyway!

In this context, it is especially concerning that the SEC’s proposals appear to undermine the clear choice between sales versus advice that Congress intended when establishing the ’40 Act in the first place. After all, it’s hard to imagine that consumers will understand the sales-versus-advice distinction when the proposed Form CRS disclosure states that consumers may receive advice from a broker on a transactional or episodic basis or from an investment adviser on an ongoing basis (when the SEC already requires advisors providing transactional or episodic advice in the form of hourly and project planning fees to become investment advisers anyway), and it is unclear how any consumer could understand their choices given the Form CRS disclosure that broker-dealers “must act in your best interest and not place our interests ahead of yours” while investment advisors “are held to a fiduciary standard” which the SEC defines as the obligation to “act in the best interest of the client” as well!

Similarly, while the SEC’s advice rule proposes to reduce consumer confusion by limiting the use of the “financial advisor” term by standalone broker-dealers and their registered representatives, it continues to allow hybrid advisors to use the label, knowing full well that at least a portion of the advisor’s services will not be in his/her capacity as an advisor but as a salesperson. In other words, advisors are explicitly being granted permission to market their services as “advice” and implement that advice without being subject to the appropriate standard for advice, without any requirement to explain to the consumer when the advice relationship ended. For which the SEC suggests consumers might be “confused” by a requirement that the advisor clearly disclosure and use proper labels for the “hat” being worn… instead of recognizing that the confusion stems from the nature of the dual-hatted advice-and-also-sales relationship in the first place, for which clear use of titles at all times alleviates the confusion!

The bottom line, though, is simply to recognize that the real problem in the marketplace for financial advice today isn’t that broker-dealers are giving advice without being subject to the fiduciary duty that has always been applied to advice relationships of trust and confidence, or that the application of a fiduciary duty to the broker-dealer model could limit choice (and thus why a lower Regulation Best Interest standard is needed instead). The real problem is that Congress articulated in the Investment Advisers Act of 1940 that consumers should have a choice – between brokerage sales and investment advice – which the SEC’s Regulation Best Interest proposal not only fails to honor, but risks undermining to the detriment of advisor competition in the marketplace and the elimination of clear choices for consumers.

In any event, though, whether you agree or disagree, the time to do so is now, as the 90-day Public Comment period on the SEC’s proposals ends on August 7^th. So, if you haven’t submitted your own comments to the SEC about why Regulation Best Interest and Form CRS should, or shouldn’t, move forward… now is the time to make your voice heard!