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Here’s yet another unpopular idea. Reg BI is no more than SEC posturing and won’t have a substantial impact on the way people do business.
Fiduciaries knocked off the soapbox they were never really on
Now that broker dealers can call themselves fiduciaries, according to a recent move by the SEC, the RIA firms are tumbling down off their “I’m a fiduciary” soapbox. And half their marketing agenda falls down along with it.
If you’ve read any of my past writings, you know I was never a fan of this goody-two-shoes, fiduciary line.
Let me quote myself:
“Saying people should pick you because you act in the best interest of your client is like saying they should pick you because you brush your teeth in the morning.” - Sara Grillo, CFA
Indeed, Reg BI is a nightmare for RIA marketing. It makes it so that the broker dealers can say the same pandering, soapbox-preaching statements that the RIA world does – the tagline they’re so proud of: “We put our clients’ interests first.”
Guess what: They were saying that anyways!
Go to any hybrid RIA/broker dealer firm’s website and you’ll see that 0.0% of them give any indication they’re optional fiduciaries. This is one of the reasons the public is so confused about this. Look at how it’s presented to them!
It doesn’t change anything because by now most reps are dual registered and all along they’ve been intimating that they operate in the same way that fiduciaries do. This puts an end to the bragging about being a fiduciary like you are Mother Teresa. This is who gets to brag. See these people breakdance? Click here.
Now that’s enviable. RIA firms, get ready to break out with the financial equivalent of a headspin.
Too boring for anyone to notice
In a press release earlier this month (in the typical legalese that is the way regulators communicate), the SEC has outlined that:
The Form CRS Relationship Summary will require registered investment advisers and broker-dealers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional.
Splendid.
Does anyone read the ADV, besides the advisor and the advisor firm’s legal team? I mean, has a single retail investor ever asked you a question on this?
No.
People have zero interest in your Form ADV. Understand that there are people with criminal records disclosed on their ADV, and they’re operating thriving businesses. You can have every conflict of interest in the world in that ADV! People don’t read it. People don’t care.
Prospects make decisions about advisors emotionally. If the client likes you, they’re going to do business with you no matter what it says in your ADV.
Too confusing for anyone to understand
And even if people were able to get through a Form ADV without falling asleep, would they find any clarity in it? No. To anyone who is not a financial advisor, this stuff is legalistic mish mosh, highly overwhelming and confusing.
Let me tell you a story. Recently, a very close friend was looking for an investment advisor. This person is the smartest person I know, which is why I thought he’d be able to grasp these basic terms:
- Advisor versus broker
- Fee versus commission
- FINRA versus SEC versus state registered
Well, I had to refer him to five articles and I’m not even sure he got it. At the end he was like, “Oh, so that’s what a FINRA rep is. That’s nice. By the way did you hear that Jay Z and Beyonce turned vegan?”
Lack of resources to actually do anything
In the same press release, the SEC outlines in vague terms what Reg BI will do:
Broker-dealers will be required to 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. Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.
I don’t even know how to interpret this. No clarity about what concrete actions will be taken. We’ll see how far this goes. I doubt the SEC is going to enforce this with enough vigor to make any real change. Why? There’s too much money involved for them to do that.
Yes, that is a politically shrouded statement. You know what institutions I am referring to; I’m not saying them here. By now you all know how to find me on Twitter (I’ve been dragged so many times, you haters know how to find me), tweet some cheap shots at me.
Deal?
And pray tell, SEC, how are you going to monitor this? How are you going to put into effect a ritualistic change to the daily actions of more than half the industry? This is the equivalent of telling 300,000 right handed people they have to learn to write with their left hand.
Do the regulators have the resources to police this? Remember they were the ones who failed to respond to Harry Markopolos’s blatant exposure of Bernie Madoff.
SEC to the rescue?
No such thing as perfect alignment
To say the world is going to come crashing down now that the brokers can call themselves fiduciaries is a bit overblown. I’m not convinced that most broker-dealer reps are fee mongers. There are many clear instances of gross fee grubbing. Yes indeed. However, from what I have seen, the average rep isn’t blatantly ripping people off. Many just hold their FINRA licenses because they are collecting trailer commissions on business from years ago.
There are a number of things I’ve seen RIA firms do that are clearly not in their clients’ best interests either. Hint: More AUM in the relationship means more fees. Show me an RIA firm who encourages people to invest in real estate, private equity deals that they don’t get a cut of, or commodities where they don’t broker the trade. Yes, pay off that student loan and forget about that brokerage account we were going to set up.
And do you really think it's a good thing that RIA firms rarely get audited?
Facts!
Sara’s upshot
Whatever kind of advisor you are, you need a non-clichéd brand and a strategic way of getting clients. If any of you still like me after reading this, I hope you’ll join my membership and let me teach you about how to get clients through social media by clicking here.
Sara Grillo, CFA, is a marketing consultant who helps investment management, financial planning, and RIA firms fight the tendency to barf meaningless cliché on their prospects and bore them as a result. Prior to launching her own firm, she was a financial advisor and worked at Lehman Brothers.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.