Industry Heavyweights Kitces, Fisher Weigh In On SEC Rules

Days before the Securities and Exchange Commission's comment period closed, industry heavyweights Michael Kitces and Ken Fisher shared their thoughts on the threefold rule proposal containing a fiduciary standard, Regulation Best Interest and Form CRS.

Kitces, cofounder of XY Planning Network, publisher of Kitces.com and partner and director at Pinnacle Advisory Group, penned a 13-page response to the proposal.

“I have substantial concerns that many of the proposals as written will compound consumer confusion and reduce clarity regarding the choices that retail investors have when engaging with the financial services industry,” Kitces said in his statement.

In his response, Kitces argued that a different standard for broker-dealers is “unnecessary.”

He continued that the current suitability standard can effectively moderate sales activities.

“The solution to consumer confusion is not to lift the standard for brokerage sales to a best-interest standard because it also entails a substantial amount of advice; instead, the better solution is to simply assert and maintain the bright line that Congress already created to separate sales from advice, and allow the existing fiduciary and suitability standards to clearly apply to those activities,” he said.

Kitces also addressed the debate over title reform in his statement.

Kitces says that while the SECs proposed title reform has good intentions, it won’t solve the problem.

“Consumer confusion stems not from the difficulty in distinguishing between the standards of care of broker-dealers versus investment advisors, but the fundamental confusion that arises when broker-dealers hold out as being advisors in the business of providing advice to the public while still being allowed to rely on an exemption that they are not and do not. Or stated more simply, consumer confusion about the nature of their advice (or non-advice) relationship starts from the moment that the investment advisor or broker-dealer holds out as such,” he said. “Most consumers simply cannot comprehend how a firm can state that is it offering a trusted advice relationship that by definition would be a fiduciary relationship of trust and confidence … and then not be subject to a fiduciary standard for that fiduciary relationship.”

Kitces claimed that the proposed approach allows broker-dealers to use titles similar to “financial advisor” without being subjected to the same fiduciary standards.

Reinforcing that idea, Ken Fisher of Fisher Investments said in his response to the SEC's proposed rules that inventing a new broker standard only allows for loopholes that “justify business as usual.”

Fisher calls for disharmonization of the industry in his response, saying that the SEC’s proposal only blurs the lines more.

“While it is important for brokers to operate under standards of conduct that protect investors, any further blurring, even if called 'harmonization' or branded with another catchy slogan, will only magnify the problem,” said Fisher. “Instead, we need disharmonization. We need clear, bright, red lines so investors know exactly what they are getting.”

Both Kitces and Fisher extensively discuss “solely incidental,” a term from the Investment Advisers Act of 1940 that states:

“…any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor…”

In its purest form, “solely incidental” suggests the when a broker reached the point of needing an investment adviser registration; it could only be avoided if they received no additional compensation for their advice.

Fisher calls for the SEC to enforce this rather than create a whole new standard for brokers, likening the lull in its enforcement to a parent enforcing bedtime.

“I urge the Commission to begin strictly enforcing the "solely incidental" language in the
Advisers Act, like a parent starting to strictly enforce bedtime after a long summer vacation,
which for the brokerage industry has lasted for more than two decades,” said Fisher.

Fisher also agrees with Kitces that broker-dealers hijacking the term “advisor” has created more confusion among investors.

“Over the last few decades, brokers have intentionally blurred these distinctions
by calling themselves ‘advisors’ and by offering more and more investment advice. The result
is investor confusion,” said Fisher.

While few in the financial industry agree on anything, Kitces and Fisher reinforce the need to let the current framework under the Investment Advisers Act of 1940 do its job.

When it does, said Kitces, investors and financial professionals will have the choice and knowledge to make an informed decision.

“At that point, consumers will have a clear choice between sales and advice, and broker-dealers and investment advisers will have their own choice about how they wish to serve consumers, and the standards to which they will be subject … exactly how Congress wrote it in the first place,” said Kitces.

AdvisorNews Managing Editor Cassie Miller has an extensive background in magazine writing, editing and design. Cassie may be reached at [email protected]. Follow her on Twitter @INNCassieM.

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