When a stockbroker recommends a particular investment, might he/she be influenced by a commission or bonus that choice provides? To shield against such conflicts, the US Securities & Exchange Commission (SEC) has adopted new rules for brokers—as part of what’s called Regulation Best Interest (Reg BI)—that go into effect June 2020. However, despite the SEC’s stated goals to raise the standard of conduct for brokers and reduce confusion, critics say the new rules may do little to protect investors’ interests or clarify broker obligations. Various consumer advocates and investment advisers say the broker rules fall short of the strong new “fiduciary” standard that, under a separate change, Certified Financial Planners (CFPs) will have to adhere to starting in October.
The rules state that brokers must refrain from putting their own interests above those of clients and require that their recommendations are in their clients’ best interests. The SEC says that’s a step up from the old rules, which say recommendations by brokers generally must be “suitable” for a particular client’s characteristics, such as age and risk tolerance.
But critics say that in practice, the new rules won’t require brokers to recommend the investments they believe are the “best” possible ones for an investor. Also, although brokers will have to disclose and develop ways to mitigate potential conflicts, the disclosures may be hidden in fine print and there remains plenty of room for conflicts.
Protect yourself: Ask your broker to explain all the costs of any recommendation and whether there is a different option that is just as good or better and/or less expensive. If the adviser is not a CFP, have him sign a fiduciary oath or confirm that he is a member of the National Association of Personal Financial Advisors (NAPFA.org)