Mind on Money: New rules will impact relationship between consumers, financial services firms

By: Marc Ruiz Last Updated: March 2, 2020

In June of 2019 the Securities and Exchange Commission established a sweeping new standard of conduct for firms providing investment services and advice. These new rules, called REG B-I, are phasing in now and are required to be completely integrated into every investment firm’s policy and operations by June of this year.

The "B-I" in the title of this regulatory framework references the concept of "best interest" all firms providing investment services and advice are now required to adopt. This new standard of care defined by these rules is perhaps the most expansive change to the wealth management field during my career going back to 1993.

Investment services and advice, which are perceived similarly by consumers, are provided by financial professionals and firms through two different methods or channels. The new Rule B-I impacts both.

One channel involves a securities broker-dealer, and persons associated with a broker-dealer who can be termed brokers. When brokers provide investment guidance to investors it is done on the basis of a recommendation. With a recommendation, the ultimate decision to execute a transaction or make an investment is incumbent on the client or investor. Prior to Rule B-I, the recommendation provided by the financial professional was required by the rules governing broker-dealer firms to be “suitable” for the customer or investor.

This suitability standard is based largely on the concept of disclosure and discovery, meaning during the recommendation process the broker is required to provide balanced information on the costs and risks associated with investments being recommended. Under the suitability standard, brokers are also required to take steps through their discovery of the client’s goals and investment experience to reasonably believe the recommendation is appropriate to help the client achieve his/her objectives. Brokers under the suitability standard are most often compensated by commissions or transaction charges.

The other channel is that of the Registered Investment Advisor or RIA. Financial professionals operating through association with an RIA firm provide guidance on the basis of advice rather than recommendation. The provision of advice is subject to a standard known as the fiduciary standard.

Under the fiduciary standard, the financial professional, serving as a representative of an RIA, is required to manage and address potential conflicts of interest in the advice they provide to clients, and at times are able to actually exercise the discretion (delegated by clients) to make investment transaction decisions on behalf of clients. The fiduciary standard of care requires RIAs and their representatives perform due diligence on behalf of clients to ensure investments and investment service providers are chosen and utilized in the best interest of the client. RIA firm advisers are most commonly compensated by planning or asset management fees.

Of the two standards, suitability and fiduciary, the fiduciary standard was considered by many to be the more rigorous standard and the one benefiting investors and clients to a higher level. During the Obama administration, the government, through the Department of Labor (DOL), took steps to expand the fiduciary concept over both conduits of the wealth management industry. At the time, the DOL asserted that its regulatory authority over retirement plans provided the agency the basis to regulate the entire investment services industry.

The DOL Fiduciary rule was somewhat controversial and ended up being tested in federal court. Ultimately the Trump administration decided not to defend the rule in court and it was never fully implemented, and eventually vacated.

During the DOL rule making and litigation process however, consumers became more aware of and attracted to the fiduciary service model and many investment firms began gravitating toward primarily providing fiduciary relationships to their clients.

I believe the SEC in reacting to this change in consumer preference, as well as its perceived role as the proper regulator of the wealth management industry developed and introduced the new Rule B-I.

The new rule is large in scope, and its implementation is likely to impact most relationships between consumers and financial services firms. Under the rule the standard of care between brokers and RIA firm advisers will be much more closely aligned and over time I believe consumers will find the industry more straight forward to navigate. We will continue to explore.

Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial.  Contact Marc at marc.ruiz@oakpartners.com.  Securities offered through LPL Financial, member FINRA/SIPC.