When working with a trusted financial advisor, you probably assume that they are giving advice in your best interest. But, how can you be sure?
What is Regulation Best Interest?
On June 30th, 2020, the Securities and Exchange Commission (SEC) began enforcing a new rule, Regulation Best Interest, which aims to improve consumer confidence in their advisor. The regulation establishes a “best interest” standard for broker-dealers and new transparency standards for clients. “Reg BI,” as most call the rule, requires brokers to stop referring to themselves as advisors if they are not working under a “fiduciary” standard as well as the following four obligations:
- Disclose information about their recommendations
- Exercise diligence, care and skill when making a recommendation
- Abide by policies that address conflict of interest
- Comply with policies and procedures in the regulation
The last requirement that Reg BI has is the Client Relationship Summary (Form CRS). This form, which provides clarity about the broker-dealer’s abilities, now must be delivered to all prospective clients.
Where did Regulation Best Interest come from?
First, it is important to understand the difference between an investment advisor and a broker.
An investment advisor typically makes money by charging an annual fee for ongoing advisory services. Investment advisors are regulated by the Investment Advisers Act of 1940 which holds them to a strict “fiduciary” standard.
A broker typically makes money by charging a commission on each trade they execute for their clients. Brokers are subject to FINRA (Financial Industry Regulatory Authority) which holds them to a less strict, “suitability” standard.
Regulation BI is the successor of the Department of Labor’s failed Fiduciary Rule. The Fiduciary Rule was passed during the Obama administration but then was rejected in a federal appeals court in 2018. Trump administration officials did not contest the court’s ruling, essentially killing the rule. The Fiduciary Rule would have held both brokers and investment advisors to a “fiduciary” standard.
Reg BI is a step towards a higher standard of care for brokers, but it may be an interim step on the way to the full “fiduciary” standard for both brokers and investment advisors.
What exactly is a “fiduciary” financial advisor?
The “fiduciary” standard means your advisor is legally required to act in your best interest. They have strict standards and must always disclose conflicts of interest and provide a full disclosure of their fees.
Our team’s takeaways
Overall, our team believes the new Regulation Best Interest is certainly a step in the right direction. It is mutually beneficial for both advisors and for their clients if they are held to a high standard. This is what builds trust.
If you want your advisor to be held to the highest standard, make sure that they are investment advisor. This ensures that they are held to the “fiduciary” standard. If they are only a broker, Reg BI ensures that they are at least held to the “best interest” standard. While this is not quite as strict of a standard, it is an improvement on the old “suitability” standard.
Hopefully the laws and regulations continue to adapt to ensure that the relationship between clients and their advisors is one of trust.
Best,
Alex Sierra and Tori Gutierrez
Investment Advisors
Cetera Investors
Individuals affiliated with this broker/dealer firm are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services.