5 Major Changes From The Recent SEC Rules On Fiduciary Standards

The SEC’s new rules around fiduciary standards, RIAs and brokers and the slightly new “best interest” standard raised a lot of questions about the future of the business and how these new regulations will impact the financial services profession in the long run. It’s unsure yet how the SEC, FINRA and the courts will police the new regulations. There’s no question, though, the new regulations are making an immediate impact. Let’s look at five major changes the SEC Rules introduced.

Advertisement

1.      New Form CRS

RIAs and brokers will especially notice the new Form CRS (client relationship summary). The SEC extensively tested this form and put a lot of effort into making what they view as a short form designed to help consumers make better decisions. While some of the research done beforehand on testing showed consumers generally liked the idea and the form, it wasn’t clear how it would impact decision making.

Regardless of whether you’re a broker, dually registered or an RIA, the form will be a new requirement for you. Dual registered advisors or firms will face unique challenges the other two won’t when filing the Form CRS. Since they play two roles, they need to identify when they’re acting in one role over the other. Requiring conflicts, fees, and services to be disclosed on a document is important as it can create a legal standard to uphold what one promises on the form.

2.      New Best Interest Regulation and Standard

While many advisors and fiduciaries have been required to act in the best interest of their clients for years, Regulation Best Interest (BI) expands to broker-dealers. Regardless of what side of the fence you’re on, this is a higher standard of care than the suitability standard of care broker-dealers were generally held to under the SEC rules.

What exactly is the new standard of care? More than passively acting in the best interest of clients, the SEC stated that those adhering to this BI standard will need to disclose, identify and mitigate conflicts of interest. The best interest standard requires the individual to place the client’s needs above their own.

However, the question now becomes: Is a well-documented suitability standard that discloses core conflicts enough to meet the standard. Could the new best interest standard really just be suitability plus disclosure?

3.      Dual Registered Complexity

As noted with the new Form CRS, dual registered individuals face even more complexity under the new SEC rulings. The new forms and disclosures will add some paperwork and additional maneuvering, but it’s only a little extra time and effort.

The area likely to be the biggest change is with the use of the term “advisor/adviser” when it comes to dually registered financial professionals. While the SEC didn’t make a new rule banning their use, it did explain that calling yourself an advisor or adviser when acting in a broker role would violate disclosure requirements.

The SEC cited the complexity of using “advisor/adviser.” Technically, the individual is registered as an RIA and therefore can call themselves an advisor or adviser. However, the SEC noted that when acting as a broker for a client, it might not be appropriate to use “advisor/adviser.” This implies the individual will have to take off their advisor hat and clearly identify themselves to consumers when they’re switching roles. The tedious titles and terminology technicalities could become a headache for advisors who switch back and forth with clients frequently.

4.      AUM Under Pressure?

When the U.S. Department of Labor (DOL) tried to pass a fiduciary rule a few years ago, the asset under management pricing model came under subtle fire. The DOL argued that encouraging a rollover of plan assets to an IRA for a professional to manage under an AUM model had a clear bias and conflict that needed disclosed. The rule was never fully phased in as the U.S. Fifth Circuit Court of Appeals vacated it in 2018.

The SEC has continued to move down a similar path, taking another subtle shot at the AUM advice model. The SEC ruling made it clear that advice and fees need to be in conjunction with each other – if you’re charging a fee for assets under management, the fee still needs to align with the services and advice provided.

For many years, some AUM models have become lazy, taking the fees but providing little advice. They adopt a “set it and forget it” mindset and schedule one or two annual meetings to check in with the client. RIAs need to make sure they’re providing value for their fees, even in an AUM model.

5.      Work on Value Proposition

As the standard of care for RIAs and brokers get closer under the new SEC rules, advisors need strengthen their own value proposition. In the past, fiduciaries believed they acted in the best interest of clients. This was their differentiator.

But next year, that differentiator will cease to exist. RIAs need to dig deeper into what being a fiduciary means. Fiduciary is a long-term relationship, requiring constant monitoring of accounts, updating and working together.

Broker roles are transactional by nature. The SEC pointed out they cannot have a financial and legal requirement to engaging in a long-term relationship that includes monitoring and ongoing advice. This is just a legal standard. Whether you are an advisor, broker or company, the SEC rule highlights you should charge fees in line with the services you provide. Work on your services, value proposition and differentiate yourself from the market.

Jamie Hopkins, Esq., LLM, MBA, CFP®, RICP®, is the Director of Retirement Research at Carson Wealth and a former professor of Taxation at The American College, where he helped co-create the Retirement Income Certified Professional® (RICP®) education program. Jamie strives to increase the retirement income security of Americans by delivering practical and trusted retirement research and education. His most recent book, “Rewirement: Rewiring The Way You Think About Retirement,” details the behavioral finance issues that hold people back from a more financially secure retirement. He has been selected by InvestmentNews as one of the top 40 financial service professionals under the age of 40 and was also selected by The American Bar Association as one of the top 40 Young Attorneys in the country. In 2017, Trusts & Estates Journal awarded Professor Hopkins the Distinguished Author Award for his article on the Department of Labor Fiduciary Rule. He holds his LLM in Taxation from Temple University School of Law and his J.D. from Villanova University School of Law.