The Securities and Exchange Commission adopted Regulation Best Interest on June 5, 2019. The regulation addresses the standard of conduct for broker-dealers and is designed to up the litmus test on the types of recommendations broker-dealers can make to their retail clients beyond existing suitability obligations.
It falls short of subjecting broker-dealers to the highest and best fiduciary standard. Pam Krueger writes for Forbes that the rule, “affirms–if not directly, then by implication–that investors are best served by financial advisers who serve as fiduciaries for clients.”
It also continues investor confusion over who offers what.
Best Interest vs. Fiduciary
At issue in Regulation Best Interest is whose interest is uppermost when a broker-dealer selling products makes a financial recommendation – the client’s or the broker-dealer themselves. The SEC rule requires that broker-dealers act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. This differs from an SEC-registered investment advisor (RIA), who is held to the highest legal standard, fiduciary.
Let’s not lose sight of how important this difference might be to investors looking for advice they can count on. In a special report by Barron’s magazine, writer Karen Hube names 10 Principles of Financial Proficiency. These include setting goals, investing in your retirement plan, and avoiding bad debt. Her final point, Seek unbiased advice, however, is a worthy goal for all investors. She writes:
“Make sure your advisor has your back. Look for experts who act as fiduciaries, meaning they put your interests first and avoid conflicts of interest such as selling products on a commission.”
There is, however, widespread investor confusion over who they are working with. Titles really do matter in financial services, but it can be hard to know which title means what. Hube advises:
“Look for well-respected designations earned through educational programs and ongoing coursework, such as CFP (Certified Financial Planner) or CFA (Chartered financial analyst.”
While broker-dealers must now act in the retail customer’s best interest, the rule isn’t clear on what is “best interest.” This calls into question what level of care broker-dealers will be held to, creating confusion for retail investors deciding whether to work with a broker-dealer or an RIA. Given how divisive the issue of “best interest” has been over the years, more clarity is unlikely to come anytime soon.
Bringing it Home
RIAs like those at Wambolt & Associates represent less than 2% of all money managers. Chances are you won’t find an SEC-registered investment advisor unless you are specifically looking for one.
All RIAs such as Wambolt & Associates are held to the highest legal fiduciary standard in the industry. We work for you. Contact us to learn more or to book a free consultation.
Read more
Follow Wambolt & Associates on LinkedIn
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Wambolt & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Wambolt & Associates or performance returns of any Wambolt & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Wambolt & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Wambolt & Associates provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Wambolt & Associates is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.