I’ll start with the answer: 771 pages. That’s the size of the new “Regulation Best Interest: The Broker-Dealer Standard of Conduct” rule just approved by the SEC. Why did the SEC feel we needed this legislation? It’s a long story.

After the 1929 collapse of the U.S. stock market and the subsequent Great Depression of the 1930s, Congress decided to take action to prevent such events from happening again. They passed the Securities & Exchange Act of 1934 which created the SEC and promulgated new regulations for broker/dealers (BDs) who, at the time, were focused primarily on buying & selling securities.  Among other things, the 1934 act required that BDs be able to demonstrate that any recommendations they make to their clients are “suitable” for each client. Six years later Congress took aim at registered investment advisors (RIAs), who were (and still are) in the business of providing investment and other financial advice to clients. The Investment Advisors Act of 1940 required that RIAs maintain a fiduciary relationship with their clients. This means they have to put their clients’ interests ahead of their own. Interestingly the 1940 Act (and its more stringent fiduciary standard) did not cover BDs, presumably because their main business was selling securities rather than providing investment advice. In fact, BDs were specifically exempted from this act as long as any investment advice they provided to clients was merely incidental to their primary business.

The difference between a fiduciary standard and a suitability standard might sound trivial, but it’s not. Here’s an example. Under the suitability standard, a commission-based BD could recommend the higher-priced of two mutual funds (thereby making more money on the transaction) as long as both funds are considered suitable for the client. RIAs would be required to offer the lower-priced fund because otherwise they would be putting their own interest ahead of that of their clients, a clear violation of the fiduciary standard. Over time, this difference can add up to higher costs not to mention poorer advice.

Getting back to our chronology, more recently BDs started promoting themselves as investment advisors rather than as securities salespeople because it made them sound more professional and unbiased. And especially because it was great for business. As a result, a bigger and bigger portion of many brokerage firms’ overall income started coming from investment advice. Regulators appeared not to pay much attention to the fact that these firms should have become subject to the 1940 Act fiduciary rule since investment advice was no longer an incidental part of their business.

After the second worse stock market collapse in U.S. history in 2008, lawmakers once again decided to do something to try to prevent another economic derailment. The difference between the standards applied to RIAs vs. BDs came under the microscope. The simple solution would have been for the SEC to start enforcing the provisions of the existing Investment Advisors Act, requiring those BDs that provided investment advice to adhere to the fiduciary standard. Instead, in 2012 Obama attempted to rewrite the rules to create a single fiduciary standard.  As he put it, “It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.” While that is certainly a good idea, brokerage and insurance firms were very resistant to the fiduciary standard, with all the legal and financial risks that it would entail to their business models. So they used their wealth & influence to begin lobbying to ensure the new rule would allow them to avoid having to become fiduciaries but at the same time continue to be able to call themselves investment advisors.

And so seven years and countless millions of taxpayer dollars later we find ourselves with the 771-page Regulation Best Interest rule. BDs and RIAs will continue to be governed by two standards, and BDs will continue to be allowed to provide advice as well as sell products. The new regulation relies mostly on additional disclosures to make the difference between them clear to the public. Not surprisingly the brokerage industry is happy with the result, while most consumer groups oppose it. Pamela Banks of ConsumersUnion (parent of Consumer Reports) wrote, “There is mounting evidence that the proposed [disclosure] Form CRS would increase investor confusion and the potential for investors to make costly mistakes… the proposal falls short of providing a true uniform fiduciary standard for brokers and advisers and it does not adequately address the conflicts of interest that may compromise broker-dealers’ investment advice.”

If you prefer to work with a BD rather than an RIA, there is one way to improve the situation. CERTIFIED FINANCIAL PLANNER™ practitioners are now all obligated to provide financial advice under a fiduciary standard regardless of whether they are BDs or RIAs. Limiting your selection to a CFP® professional should improve your chances of getting real advice rather than being sold products.