It’s a sunny Saturday afternoon. You’re in the mood to barbecue, so you hop in the car and head over to your friendly neighborhood butcher shop to get some meat to throw on the grill.
Or, maybe it’s a weekday afternoon, and you’re headed off to an appointment with a dietitian who is going to evaluate your diet and its healthfulness – or not – to help you figure out what you should be eating more of, or less of, and why.
Two different kinds of encounters, with very different end results. When you visit the butcher, you expect that he’s going to sell you some meat – and it will probably be tasty, although not necessarily healthy – and it will also be good for his bottom line to make the sale.
On the other hand, when you visit the dietitian, you can expect that she’s going to tell you what foods would be best for you to eat. Even though you’re probably paying her a fee for the appointment, her advice is given without any consideration to what might be in it for her.
Believe it or not, you can take the story of the butcher and the dietitian, and apply it to the investment world.
The storyboard below, created by the HighTower Company1, shows the difference between an investment professional who works at a broker dealer – the butcher – and an investment professional who works for a Registered Investment Advisor (or RIA) such as SJS Investment Services – the dietitian.
Broker dealers (think – butcher) are supervised by a group called FINRA, a self-regulatory oversight body, or SRO. That’s right – broker dealers are supervising themselves. (FINRA is overseen by the Securities and Exchange Commission, which does have the power to approve or reject any rules FINRA may wish to adopt.)
RIAs (now, think – dietitian) are regulated directly by the Securities and Exchange Commission, and are held to what’s called “a fiduciary standard” by the SEC.
What does that mean? Simply put, firms like SJS have a responsibility to behave in a way that is in the best interest of our clients. There should be no conflicts of interest.
A broker dealer’s standard of care is one of what’s called “suitability.” As long as the investments being sold can be considered “suitable,” FINRA is satisfied. Even if the broker may recommend investment products to his clients because they offer him a higher commission – and not necessarily because the products may be in a client’s best interest.
How does that sound to you? Does a “suitable” investment sound good enough? Or are you thinking, “That doesn’t seem right. Somebody should make all investment professionals play by the same rules.”
There was an attempt to do so. In 2016, the Department of Labor introduced the Fiduciary Rule to require broker dealers to operate under the same standard of care as RIAs.
But, those broker dealers carry a lot of sway in Washington D.C. The Securities Industry and Financial Markets Association (SIFMA) and the Financial Services Institute (FSI), which represent the independent broker-dealer industry, argued in statements to the Fifth Circuit Court of Appeals that they are not in the business of advice, and not in an advice relationship of trust and confidence with their customers.2,3
Go ahead, re-read that last paragraph.
In my experience, just about all broker dealers’ ads and marketing materials sure sound like they want you to believe they are in the advice business.
Sadly, the Fiduciary Rule went down in flames earlier this year. The SEC has proposed a new “Regulation Best Interest” rule that would establish a standard of care for all broker dealer representatives and require them to act in the best interest of their clients when making recommendations.4 However, at this point in time, the “butcher versus the dietitian” remains the current state of things in the investment world. Investors still need to beware of a butcher in dietitian’s clothing.
We realize this scenario is complicated. Remember, we’re always here for you, to answer any questions you might have, or to simply talk through what we believe are the differences between a broker dealer, and an RIA like SJS. Just give us a call!
1 “HighTower Whiteboard Animation: Brokers vs. Fiduciaries,” YouTube.com, March 16, 2012.
2 “DOL Rule One Step Closer to Death,” wealthmanagement.com, May 1, 2018.
3 “Financial Industry Celebrates, Mourns Fiduciary Rule Decision,” www.fa-mag.com, March 16, 2018
4 “Proposed Rule: Regulation Best Interest,” www.sec.gov, April 18, 2018.