The financial advice industry has long been separated between 1) Registered Investment Advisor firms (RIAs), which operate under the Investment Advisers Act of 1940 and whose representatives’ duty is to deliver investment advice, and 2) Broker-Dealers, whose representatives are in the business of selling financial products. Previously, there was a clear distinction between the standard of client care required of RIAs and broker-dealers. RIAs are bound to a fiduciary standard as a result of a 1963 Supreme Court case, SEC v. Capital Gains Research Bureau, Inc., which imposed a fiduciary duty on RIAs thus requiring them to place clients’ interests ahead of those of the firm’s. Broker-dealers, including nationally known wirehouse firms, were held to a “suitability” standard, a lesser measure, that allowed brokers to sell products that while “suitable” for clients, would not necessarily be considered in the client’s “best interest”.
To increase the standard of client care required of broker-dealers, the U.S. Securities and Exchange Commission released Regulation Best Interest on June 5th, 2019. While the new regulations appear to be an improvement over the previous “suitability” standard, in over 700 pages, the new regulations 1) fail to impose a fiduciary requirement on brokers and 2) fail to even define “best interest”.
As a Registered Investment Advisor, Fifth Set Investment Advisors embraces the fiduciary standard of client care. We also believe that placing the interest of clients ahead of ours is not a complicated endeavor. So, we condensed our client care beliefs down to the following seven bullet points.
- Require that titles reflect the service provided – Require brokers to use the title “broker”, not “wealth manager” or “financial or investment advisor”. Require Insurance salespeople to use the title “insurance salesman or saleswoman”, not “wealth manager” or “financial or investment advisor”. Only those professionals solely regulated by the Investment Advisers Act of 1940 should be allowed to use the title Advisor (Adviser).
- Require advisor compensation be investment choice agnostic. – Advisors should be personally financially agnostic to client investment decisions.
- Require independent academic evidence to support investment recommendations – Placing client interests first should require independent evidence, not marketing, stories or big personalities, to support investment recommendations and strategies used.
- Require consistent processes when conflicts are unavoidable – For example, under fee-based compensation, the question of how much of a mortgage a client should take (or pay down) presents a conflict of interest with the advisor. Require the use of a consistent process to analyze the qualitative and quantitative tradeoffs when working through this type of issue.
- Eliminate product sales – If someone presents themselves as an advisor, they should advise, not sell.
- Eliminate third party compensation. Compensation solely and directly received from clients leaves no doubt about whose interests are being served.
- Require advisors to achieve a professional credential. We believe that investment advisors should be required to achieve a professional level of competence through a designation at least as difficult to pass as the CPA exam or the attorney bar. The closest example of such a credential that exists today is the Chartered Financial Analyst (CFA) designation.
is the founder and principal of Westchester, New York-based, Fifth Set Investment Advisors LLC, a Fee-Only, SEC registered investment advisory firm. Following a career in equity research, an examination of competing investment management approaches led Ian to create Fifth Set to offer clients customized wealth management strategies built on a foundation of evidence-based financial theory.