A New York Times personal finance column on potential regulations by the Department of Labor and Securities and Exchange Commission that would require registered representatives to provide a fiduciary standard of care to their clients claims that “it’s all too easy for stock and insurance brokers to avoid rules that require them to put their customers first….”
It seems the columnist may not have a clear understanding of how NAIFA members and other insurance advisors operate. First, they are among the most tightly regulated financial professionals on the planet. They are bound by so many rules that it would make your head spin (see more on that below).
Second, insurance advisors rely on their good reputations to ensure that they get referrals and repeat clients. Those who do not have their clients’ interests at heart are not successful in the business for long.
A regulator-imposed fiduciary duty would entail far more than simply “acting in the best interests of clients.” It is a legal requirement with potential liability costs. It could threaten business models that advisors have used to successfully serve tens of millions of clients.
The real questions are whether insurance and financial advisors should be subject to more extensive federal regulation, whether additional regulations would address real problems and whether those regulations could harm the consumers they would aim to protect.
A Common Misperception
According to the Times column, “Brokers are currently required only to recommend ‘suitable’ investments, while investment advisers must act in their clients’ best interest. The S.E.C. rule would generally put them on even footing.”
We don’t think so.
Rules and regulations imposed on registered representatives of broker-dealers go far beyond those requiring them to recommend suitable products. Registered reps must comply with dozens of rules covering nearly every aspect of their businesses, from how they communicate with clients to how they interact with senior citizens, from how they advertise to how they keep and maintain records.
The much maligned suitability standard is governed by no fewer than six Financial Industry Regulatory Authority (FINRA) rules and more than a dozen Regulatory Notices and Notices to Members. It requires registered reps to compile and regularly update detailed investor profiles for each client. Registered reps must get to know their clients and have a strong understand of their clients' interests.
Unlike a fiduciary standard, under which claims of a breach are investigated only after the fact, the suitability standard is rules-based and forward-looking. Registered reps face near constant scrutiny and annual compliance reviews by their broker-dealers. The broker-dealers, in turn, are subject to detailed FINRA examinations approximately once every two years.
For the sake of comparison, the SEC has said that it examines fewer than 9 percent of investment advisers each year, and more than a third of investment advisory firms have never undergone SEC examination.
Meanwhile, no studies convincingly show that the advice given by investment advisers is “superior” to that given by registered reps. It is unclear what problems a DOL- or SEC-imposed fiduciary regulation would address.
Furthermore, the claim that heaping additional regulatory burdens on registered reps and their clients would put them “on even footing” with investment advisers is simply not true. FINRA is not going away. Registered reps would still have to comply with FINRA rules in addition to whatever new regulations the DOL and SEC might impose.
Some in the investment adviser crowd have pushed for additional regulation of registered reps (they seem to believe having stricter regulations for those they perceive as competitors would be in their best interests), but very few have volunteered to subject themselves to the FINRA rules currently applying to broker-dealers and registered reps.
There is plenty of room for different business models and different regulatory regimes in the financial services universe. Contrary to the Times column’s claim that the industry and others are “waging a campaign against any proposed new rules,” NAIFA is not opposed to regulation. Good regulations are crucial for protecting consumers and ensuring the integrity of our members’ industry.
We simply hope that the DOL and SEC ensure that any new regulations address clear problems and do nothing to hurt middle-market investors who are largely served by NAIFA members.