Fiduciary redux: Don't tinker with Reg BI

Here we go again.

A Senate hearing for President Joe Biden’s nominee for chairman of the Securities and Exchange Commission, Gary Gensler has yet to be scheduled, but that hasn’t kept Regulation Best Interest critics from coming out again, this time with a white paper published by the Institute for the Fiduciary Standard calling for the commission “to move quickly to correct the [Reg BI] rulemaking and interpretations.”

Amending a painstakingly crafted regulation of the magnitude of Reg BI less than a year after it became effective might seem a bit premature — like re-renovating a house a year after it was taken down to the studs. But given that Gensler chaired a commission in the state of Maryland that advocated for the state to adopt a fiduciary standard, fiduciary purists see an opportunity to tinker with, if not fully redo, one of the signature achievements of previous SEC Chairman Jay Clayton.

That would be a big mistake.  

The Institute for the Fiduciary Standard represents a segment of the industry that believes in a “one-size-fits-all” approach to wealth management and advocates an Investment Advisers Act of 1940 approach to all investor needs.

Reg BI, by contrast, recognizes that a one-size-fits-all approach to regulating broker-dealers and registered investment advisers doesn’t work because B-Ds and RIAs have inherent differences. Reg BI strikes an appropriate balance: raising the bar for investor protection while at the same time preserving access and choice for individual investors as to what kind of advisers they work with, what mix of services best serves their wealth management needs, and whether they pay for those services via commissions, fees or a blend of the two.  

The client choice approach reflected in Reg BI is in fact the best approach for individual investors — the one that provides the highest opportunity for successful outcomes — because every individual and family is unique when it comes to their wealth management needs and goals. The optimal mix of commission-based brokerage accounts, discretionary advisory accounts, retirement accounts, and fees and commissions depends on each individual’s and family’s circumstances and preferences.

The consensus is that a Gensler-led SEC (assuming his nomination is confirmed) is unlikely to take on a full and direct overhaul of Reg BI, but will instead implement more aggressive enforcement and issue more restrictive guidance.

Even so, instead of pursuing the holy grail of a one-size-fits-all fiduciary standard, fiduciary advocates would be better served to look across financial markets to where there truly is a burning platform in need of heightened investor protections – namely, the Wild West world of online commission-free trading.

There, on advice-free or advice-agnostic online trading platforms, not in brokerage accounts covered by Reg BI and regulated by Finra and the SEC, is where real and lasting damage has and will be done to the wealth of individual investors. That’s the first place the next SEC chairman should focus his attention, along with the full enforcement resources of the SEC.

[More: Where opportunity meets responsibility]

John Taft is vice chairman of Baird and past chairman of the Securities Industry and Financial Markets Association. He shares his perspective on his blog, Finance for the Greater Good.