The SEC just approved a massive change to how brokers give financial advice

  • The SEC just voted to make a massive change to the financial brokerage industry.
  • The new standard required brokers to act in the “best interests” of clients.
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The Securities and Exchange Commission voted Wednesday to finalise rules related to the the duties required by investment advisers and brokers when managing client money. The two types of financial professionals differ in their compensation structure as well as their responsibilities ton investors. The new regulations will go into force in 60 days.

Typically, financial advisers collect portfolio-based fees based on assets under management while brokers charge trading commissions. Advisers typically have fiduciary duties, requiring them to act in the best interests of clients, while brokers are required only to offer “suitable” investment products. The SEC has debated a change in these standards for decades, according to the SEC statement on the matter.

“This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost,” said SEC Chairman Jay Clayton.

The new regulations have put forth a higher standard, dubbed “Regulation Best Interest,” for brokers. Under that, brokers will be required to act in the best interests of retail clients when recommending stocks, bonds or any other investment securities.

These changes represent a significant step up from the “suitability” standard currently in force. According to the SEC, the new regulations will “make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”

Brokers will, however, continue to be able to charge commissions which the SEC had previously considered barring.

They will also be required to disclose any conflicts of interest, including information about any fees received for products they reccomend. Importantly, disclosure of any exceptions to the rule will not always work. Previously, firm had sought to use “fine print” to avoid the legal consequences of conflicts, such as the use of proprietary products which generate additional fees.

All three Republican SEC commissioners voted for the changes, with lone Democrat Robert Jackson dissenting. Jackson criticised the reform as not going far enough to protect investor interests.

“Rather than requiring Wall Street to put investors first, today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice,” Jackson wrote in a statement.

Cerulli Associates estimates there are over 300,000 brokers in the United States. Brokers represent an important source of advice for the $US28 trillion of retirements assets held by US investors. There are over $US9 trillion held in IRAs alone according to Pensions & Investments.

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