SEC advice rule may give RIAs leg up over broker-dealers

The Securities and Exchange Commission’s advice rule proposal released earlier this week could give advisers working in the registered investment advisory channel a leg up over brokers.

The SEC released a nearly 1,000-page, three-part proposal earlier this week that would establish a new best interest regulation for brokers; a new client relationship summary for brokers and advisers; and an interpretation of the fiduciary standard of care that advisers currently owe to their clients.

Rather than forge a uniform standard, the measure maintains a distinction between brokers and advisers on client care. Brokers would operate under a best interest regulation, while investment advisers would continue to be fiduciaries.

That’s a difference that Phil Shaffer, chief executive of Halite Partners, intends to exploit.

“It helps RIAs because it leaves the status quo in place,” said Mr. Shaffer, who departed Morgan Stanley last June after 35 years in the brokerage industry. “I don’t see any material change in the conduct of brokers. That’s good for our business. We will shout it from the roof tops.”

The SEC proposal does create a new standard for brokers, but whether it’s a step up from brokers’ current suitability standard is already a matter of debate. Under suitability, brokers must sell products that meet a client’s objectives but they can recommend those that give the highest payout to themselves.

“I would call it a slight positive [for advisers],” said John Anderson, managing director and head of practice management at SEI Advisor Network, a third-party asset manager. “The RIA is going to have to do a good job educating about the difference, but it allows them to differentiate.”

The primary way that the advisers and brokers will be compared under the SEC proposal is through the client-relationship summary, which outlines services offered, legal standards of conduct, fees and potential conflicts of interest for each.

But Karen Barr, president and chief executive of the Investment Adviser Association, said that more work has to be done on the disclosure form — which essentially becomes Form ADV III for advisers — during the 90-day comment period on the SEC proposal.

“We’re concerned that it might end up confusing clients more than they already are,” Ms. Barr said. “I am pleased to see that [the SEC] will submit it to investor testing. That is critical.”

The fact that the SEC offered a sample disclosure form in the proposal is a good first step, said G.J. King, president of RIA in a Box, a compliance consultant.

“It helps the industry tremendously to provide this detailed guidance,” Mr. King said.

In addition to the disclosure form, the SEC also is requesting comment on new licensing and continuing education, account-statement delivery and capital requirements for investment advisers — a move that could subject advisers to similar rules that govern brokers in those areas.

“You can be sure that those are going to be controversial, and there will be push-back from the advice industry,” said David Tittsworth, counsel at the law firm Ropes & Gray.

Indeed, Ms. Barr has worries about the potential net capital requirement.

“Net capital is more appropriate for firms that hold assets,” she said. “Investment advisers act as agents on behalf of their clients. They’re not putting their own capital at risk.”

Mr. Shaffer is not sure why the licensing and continuing education requirements are necessary for advisers.

“They want to level the playing field [with brokers] from a CE standpoint,” he said. “They don’t want to level it from a conflicts standpoint. I don’t understand that.”

The SEC’s interpretation of advisers’ fiduciary standard also discusses how advisers approach conflicts of interest and warns that disclosing them may not go far enough.

“The extent to which disclosure can cure any conflict of interest is an issue that is raised by the interpretation,” Mr. Tittsworth said. “It is somewhat ambiguous.”

Related Topics: Securities and Exchange Commission