While the SEC has allowed for years that brokers call themselves financial advisors without requiring them to disclose all conflicts of interest or put the interests of the clients above their own financial rewards, those times are over.
This Wednesday, the SEC voted 3 to one in favor of the so-called “Regulation Best Interest”, a regulation that will require brokers to act in the best interest of investors and disclose more about conflicts of interest that may arise and potentially divert the advice they give.
The SEC said the new rule aims to provide investors with more information about complex payment incentives and other practices that can influence a broker’s advice, without upsetting Wall Street’s commission-based sales model.
The SEC did not impose brokers with a higher fiduciary duty than that applied to investment advisors, who, unlike brokers, receive a payment for managing assets on an ongoing basis.
Although the brokers and advisors will continue to be governed by two rules, SEC Chairman Jay Clayton said that the best interests rule brings brokers’ one closer to the one advisors have. “We elevate, improve and clarify these obligations in an integral way, this action was long overdue”.
The final regulation for brokers does not require that they recommend mutual funds or other types of lower cost products; Cost is just one of the factors that brokers must consider to ensure that advice meets the best interests of a customer.
This Thursday it is expected that the fiduciary obligation of investment advisers will be defined.