Bill D. from Novato, CA asks: Good Morning Mitch, I read recently that the so-called “fiduciary rule” may not be universally applied in the U.S. Is that accurate? How can an investor like me know that an advisor is acting in my best interests?
Mitch’s Response:
Thanks for writing, Bill, and for asking such an important question. The fiduciary rule – which says that all investment advisors including brokers must act in their clients’ best interests when making investment recommendations – has been under review and undergoing revisions for the last couple of years.
The SEC finally concluded the new rule in 2019, called “Reg BI.” Unfortunately for many investors, the new rule does not legally require brokers to be held to the same standard as investment advisors. In other words, investment advisors are bound to the fiduciary rule, meaning they must make recommendations in the client’s best interests. Brokers, however, are free to recommend whatever products/strategies they want (usually ones that generate commissions), as long as the strategies/products align with an investor’s goals, are free from conflicts of interest, and come with clear disclosures.1
It’s up to you, the investor, to determine if your broker or advisor is bound to the fiduciary rule.
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Here’s the problem: while Reg BI is the federal rule set forth by the SEC, some states are taking the issue into their own hands. Some states think that the higher standard for broker conduct is necessary, and as such they are taking matters into their own hands with legislation to make the fiduciary rule – or some version of it – apply to all investment professionals. I think you see what’s coming next – state regulations may differ slightly from one another, only adding to the challenges investors face in navigating the advisory world.
As I write, Massachusetts, Nevada, New Jersey, and New York have either passed or are about to pass some version of their own fiduciary rule. This means that brokers in these states will not only have to comply to Reg BI, but also the state rules. In the worst-case scenario, the additional costs incurred in complying with a complex set of regulations will get passed onto the investor, in the form of higher fees or even commissions.
Annuities are another category where the regulatory landscape is fuzzy, because annuities don’t fall under the scope of Reg BI. The National Association of Insurance Commissioners (NAIC) is the body that regulates annuities, and they recently announced they are proposing a set of rules for annuities that would closely resemble the fiduciary rule – in the best interest of the client, with full transparency on fees and provisions. Alabama, Arkansas, Arizona, Delaware, Iowa, Michigan, and Rhode Island have all adopted these NAIC suitability rules.
At the end of the day, as you can see, we’re heading towards a hodgepodge of state regulations and federal regulations, which is not great for the investor. Many investors have no choice but to do the research in their state to see what the rules are.
The easiest solution, in my view – work with advisors who adhere to the fiduciary rule, meaning they must act in your best interests always. At Zacks Investment Management, we adhere to the fiduciary rule. Simple as that.
After last year, many investors were looking for more normalcy in 2021. But, 2021 so far has been filled with many ups and downs in the market. We can help you manage your expectations this year and going forward by focusing on key data points and facts!
In our just-released March Market Strategy Report3, we make predictions for sector under and over performers, while also providing thoughts on possible outcomes of 2021. We will look at:
If you have $500,000 or more to invest and want to learn more, click on the link below to get your free report today!
Disclosure