Are You a Double Secret Adviser?

Did you know that there are regulatory organizations that spend their time debating over who's allowed to use a word and who's not? Yes, in the endless search for truth and justice in the financial services industry, we've run out of real problems…

Those in favor of regulating every single aspect of how financial service industry professionals are allowed to interact with the public were foiled a few years back. If you remember there was a proposal offered by the Department of Labor under Tom Perez (now chair of the DNC) to narrowly define the role of anyone offering financial advice as a fiduciary.

Not really as a true fiduciary. No, the proposal really looked to redefine the term fiduciary first to “the cheapest option is always the best option” for your client. And if you failed to offer the lowest cost possible to your clients, there was clearly a conflict of interest.

As such, everyone violating that would have to wear around sweaters with the letter “C” affixed to the front. That way everyone would know you’re one of those evil types that sell products that compensate you with commissions. Truly horrible for everyone and should be outlawed.

But then Hillary Lost

You could read that as being a political statement but you’d be wrong. Just a fact that’s relevant to what comes next. The proposed DOL rule wasn’t put into effect prior to Obama leaving office. Financial services companies had made preparations to accommodate the new rule(s) but after the Trump administration came into power there was no political will to continue the fight.

Yes, I’m bypassing a lengthy discussion of how it fell apart. That involves court battles and appeals that were allowed to wither on the vine. If you wanna read about it in more detail, you can by clicking here, here and here. The point of sharing that old news here is only to provide context for the discussion that’s taking place now.

Zealots Never Give Up

There are going to be some people who read this and are upset by it. The implication is that if you’re against new rules that look out for the interest of the public (those who interact with financial service professionals in particular) then you’re clearly on the side of greedy profiteers.

Profit is a good thing, never gonna read anything on this site that suggests otherwise, so let’s get that out on the table. It’s the incentive that keeps us writing these posts, recording podcasts nearly every week, chasing favorable underwriting decisions, explaining the inner-workings of life insurance policies to our clients, and signing up members to be a part of our Inner Circle.

But the new world order in financial services is controlled by those who believe there are only two choices:

1.) Business conducted by advisers who are compensated through commissions from a product or a basket of products.

Or

2.) Business conducted by professional advisers—those who offer advice and wise counsel in exchange for a fee. That fee can be paid as a percentage of your total investment portfolio that is deducted periodically or a flat fee paid directly by the client.

This new world order would like for you to believe that the first option is bad for all sorts of reasons. And therefore, to be truly virtuous and to receive unbiased, reliable, wise advice, you must work only with professionals who operate under option 2.

Enter a wicked hangover from the failed Department of Labor rule. Oh no, the momentum gained cannot be allowed to stop.

You Need to Accept BI

In a regulatory “hold my beer” sort of moment, the fine folks over at the SEC decided to pick up the ball and run. Yep, you can always count on eager bureaucrats to revive ridiculous regulations. Why would we expect anything different? That’s what they do, regulate.

Enter Reg BI.

Seriously, that’s what it is referred to in a recent article that you should check out from the National Association of Insurance and Financial Advisors (NAIFA) that you can read here. The article points out the latest fight brewing over the proposed “best interest” standard.

It’s a contentious battle raging over something super-serious. Almost as serious as the Three Stooges.

What’s the big brew-ha-ha all about? Try not to clutch your pearls too tight…the word “adviser”. Yes, the fine folks over at the SEC believe that only certain professionals within the financial services industry should be allowed to refer to themselves as an adviser.

If you are a registered representative of a broker-dealer but not an investment adviser representative of a registered investment adviser, you are not allowed to use the term adviser. I know, you’re saying to yourself, “Thank heavens, otherwise my clients would be so confused

Read this for total clarity:

A broker-dealer being affiliated with a registered investment adviser is not sufficient; the BD must also be a registered investment adviser in order to be able to use the terms “advisor” and/or “adviser”. (Please note: these restrictions only apply to broker-dealers and their registered representatives; if someone is only licensed as an insurance producer these rules regarding the use of “adviser”/ “advisor” do not apply).

Makes sense right?

The good news for people like us is that we’re license only as insurance producers. Whew, we can still call ourselves advisers! I’m sure that will make all the difference to our clients and potential clients going forward.

Now the opening line of this article makes all the sense in the world, doesn’t it? Clearly, the financial services industry has solved ALL of the REAL problems that face our clients.

How do I know that and why do I say that? Because we’re getting ourselves tangled up into a regulatory debate about who’s allowed to use a word to describe what they do. That’s a clear sign that our clients don’t require our help anymore.

Rubber, Meet Road

Look, the best interest standard or rule or whatever we’re calling it this week has good intentions. Most regulations start off that way. But you need to pay attention to this one. Here’s a link to the FAQ recently posted by the SEC that is being edited regularly as clarification is added about the best interest reg.

The big debate about using the term “adviser” is just the tip of this regulatory iceberg. If you’re involved in the industry in any way, you really need to pay attention to the developments around the regulation. That FAQ page will shock you at worst and entertain you at best.

Here’s one more highlight that’s best explained in narrative form:

Bob wants to talk to an adviser about what to do going forward to get better results with his retirement account. He makes an appointment with Mike (who works for company A). Mike recommends that he purchase a specific basket of mutual funds. Bob likes the idea but has also scheduled a second appointment with Tom (who works for company B). After talking with Tom, Bob decides he likes Mike’s recommendation but he’d rather work with Tom. So, he transacts business with Tom. Under the new best interest regulation, Mike is responsible for making the recommendation to Bob even though Tom ultimately transacted the business and was compensated.

Translation:  Mike carries the liability of the recommendation with none of the compensation.

How does that sound to you? Makes perfect sense right?

Mo Money, Mo Problems

Now you can better understand our poking fun at all of this nonsense. It’s obvious that we should all be looking out for the best interest of our clients. But that’s not something that you can regulate.

It turns out that bad people do bad things in spite of the rules and ethical people make ethical recommendations in spite of the rules. Regulations cannot make advice better. In fact, some of the worst advice that we have witnessed in our three decades of combined experience has originated from advisers that regulators would deem to be free of conflicts of interest.

We’re all human and we’re all self-interested to some degree. Yes, even those who only charge for fee-based financial advice.

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