Florida Elder Law & Estate Planning Blog

Your Broker and Your Best Interest: New SEC Rule

The Securities and Exchange Commission on June 5 introduced the “Regulation Best Interest” rule, intended to protect investors and help them make more informed decisions. Consumer advocates say it does not go far enough to protect the public, and also makes it more difficult for consumers to distinguish between services offered by investment advisors and broker-dealers.

Assuming no legal challenges produce delays, the rule is scheduled to go into effect June 30, 2020. Here is what you can expect from your Investment Advisors and Broker-Dealers:

  • Investment Advisors: The rule leaves unchanged the requirements for investment advisors. They must continue to adhere to the “fiduciary standard” as in the past. That means they must prioritize their retail clients’ interests above their own interests.
  • Broker-Dealers: Currently, broker-dealers must adhere to the “suitability” standard. Under this standard, a broker so inclined may make investment recommendations to retail clients that are “suitable” – but potentially less prudent and more lucrative to the broker-dealer than other options. Detractors of the new rule say it does not effectively define “best interest” and provides little improvement over the former suitability standard. The rule does however provide brokers with some guidance on avoiding conflicts of interest. Examples include eliminating contests and bonuses for selling only certain products; avoiding offering only a limited menu of proprietary investments, etc.
  • Investment Advisors and Broker-Dealers: Both investment advisors and broker-dealers must provide retail clients with a new “Client Relationship Summary” form outlining the nature of the services offered, fee structure, etc.

You can read about the new SEC rule and the Client Relationship Summary here.

Retirement Accounts: The new SEC rule does NOT affect retirement plans. The Department of Labor in 2016 issued a rule that would have made anyone providing guidance on retirement accounts to adhere to the fiduciary standard, but that rule was struck down in 2018.  The DOJ is now re-formulating the rule. It is widely believed that it will dovetail with SEC policy.

What Should You Do Now? As always, be informed and ask questions! Know the difference between the fiduciary duty required of an investment advisor, and the best interest duty required of a broker-dealer. Always ask the person advising you if he/she adheres to a fiduciary standard, and get the answer in writing. Do not accept a verbal response such as, “We act in your best interest.” Always ask why a particular course of action is recommended, what the fees are, and what other investment alternatives are available.