I’ve worked in and around Washington, D.C. long enough to know that words don’t always mean what they seem. I remember when ketchup was declared a vegetable for school lunches and when torture was rebranded as an “enhanced coercive interrogation technique.”
So, when broker-dealer trade associations began to proclaim their enthusiastic support for a uniform “best interest” standard for investment advice a decade ago, I should have known something was up. After all, their record of opposing any and all regulations designed to improve protections for investors was previously unblemished.
It is only in the context of the Department of Labor’s recent rulemaking to adopt a best interest standard for retirement advice, however, that the penny finally dropped. Brokers had been willing to support a best interest standard under securities laws, I discovered, because, under securities laws, the term has no meaning — or at least no meaning that a typical investor would recognize.
Ask any investor what they think a “best interest standard” means, and they’ll tell you that it means the adviser would have to choose the investment option that is best for the investor and not just the one that is most profitable for them. Most personal finance writers would tell you the same.
But ask a securities regulator what it means — or better yet, look at how it has been “enforced” by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) — and you’ll see that, for them, a “best interest” includes no such obligation.
Instead, the securities law “best interest standard,” as typically enforced, simply requires advisers to disclose the many reasons they are unlikely to act in customers’ best interests and to avoid the most egregiously fraudulent misconduct.
Industry’s outrage at the Department of Labor (DOL) is suddenly understandable. The DOL read “best interest” the same way investors do, and they set about drafting a regulation to make that investor vision of “best interest” a reality.
Most importantly, the DOL recognized that, if we want advisers to act in the best interests of their customers, we need to stop compensating them in ways that encourage and reward advice that is not in customers’ best interests.
Since the DOL rule was finalized, a number of firms have demonstrated that it is indeed possible to achieve the reduction in conflicts sought by the DOL while retaining even small savers’ ability to get advice and pay for it through commissions, if that is their preference.
Better investment products are being introduced, with lower costs, fewer conflicts and more investor-friendly features.
While some firms have made the most of the new rule, developing positive, innovative implementation plans, others have had to be led kicking and screaming into the new era.
With the change in administration, however, these industry resisters have found renewed cause for optimism that their strategy of winning a best interest standard in name only can finally succeed.
They’ve turned to the SEC in the hope and expectation that it will deliver that standard — one that requires them to make a few boilerplate disclosures about their conflicts, but certainly doesn’t require them to try to do what’s best for their customers or to eliminate practices that conflict with that goal.
How SEC Chairman Jay Clayton responds will define his legacy on issues that affect average investors. Only time will tell whether he will live up to his promise to make the SEC work for “Mr. and Mrs. 401(k)” or deliver the meaningless, watered-down standard industry has long sought and now hopes to achieve.
Barb Roper is the director of investor protection at the Consumer Federation of America. Roper is a member of the SEC’s Investor Advisory Committee, FINRA’s Investor Issues Group and the CFP Board’s Public Policy Council and Standards Commission.