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SEC Proposed Fiduciary Rule a Load of Horse Manure

You may be aware that the Department of Labor’s attempt to require financial advisers to follow a fiduciary standard when giving advice regarding retirement accounts was abandoned by the Department and died a quiet death in June. Now the SEC is proposing a new rule that it claims will clear up confusion about the services and fees for different types of financial advisers. Those rules were proposed on April 18 and, bluntly, they are a lot of hogwash.

Here is a summary of what the Institute for the Fiduciary Standard says about the proposed rules:

“In securities offerings with a broker, investors should understand they are in a relationship of three: the issuer, the broker and the investor. The broker is paid commissions to distribute products, and like a car salesman at a dealer, is only paid if he makes a sale. 

An advisor relationship is different. It’s a relationship of just two: the advisor and client. Courts say this is an “intimate relationship” from a position of trust and confidence. By law, an advisor is a fiduciary who must always be loyal and put a client’s interest first. An advisor has no hidden partners. This is a relationship of two.

This difference is fundamental and important and is not stated and explained in the proposed rules. In the proposed rules, advisors and brokers are presented as virtual identical twins. This is wrong.”

We couldn’t agree more. The proposed SEC rules make a commissioned sales person (broker) seem just like a fiduciary. And the commissioned salesperson cannot ever be a fiduciary because they are paid by their employer and not the investor.

Just as a reminder, here are the six core fiduciary duties:

  • Serve the client’s best interest
  • Act in utmost good faith
  • Act prudently — with the care, skill and judgment of a professional
  • Avoid conflicts of interest
  • Disclose all material facts
  • Control investment expenses

Please keep this in mind when you read about or hear anything about the proposed SEC rules.