SEC’s New Proposal Has Some Brokers Nervous

SEC’s New Proposal Has Some Brokers Nervous

Fresh off the implementation of the new fiduciary rule for financial advisors that went into effect earlier this year, the Securities and Exchange Commission (SEC) is looking at its own rule. They aim to apply a new standard for brokers that would bring them more in line with what the DOL requires of advisors. This has more than one broker a little bit nervous.

Since the SEC opened the comment period back in June, they have received dozens of letters from independent broker-dealers, industry trade groups, and professional organizations. A running theme seems to be fear that the SEC will eventually settle on rules that standardize both brokers and financial advisors under the same banner. Brokers are largely against such rules.

At issue seems to be the debate over the current suitability standard and acting in the best interest of clients. Broker-dealers and their allies want to protect the suitability standard as much as possible; the SEC seems intent on invoking the same fiduciary standard that now applies to financial advisors.

Investor Protection a Priority

SEC officials have long maintained that rules changes are necessary in order to protect the best interests of investors. Such claims are neither unusual or unreasonable. Investors are often at the mercy of their brokers and advisers whom they are paying for premium advice. Ensuring they are getting what they paid for was the whole point behind the DOL fiduciary rule.

Under that rule, financial advisors now have a legal responsibility to provide financial advice that is in the best interest of the client, even if that advice means less profit for the advisor. It would appear as though the SEC is looking to impose the same standard on brokers. Will they succeed? It’s anyone’s guess. The fiduciary rule is already under review by the Trump administration, so it may not even remain intact.

If a way can be found to protect investors without applying the same fiduciary standard to brokers, broker-dealers and their allies would prefer it over more stringent rules. Some believe that it is enough for the SEC to just modify the current suitability standard.

Already Strong Enough

Some critics of the SEC proposal go well beyond the idea of modifying the current suitability standard to say that the standard is already strong enough. They claim that any attempt to standardize fiduciary rules would actually dilute the high standards brokers currently adhere to.

According to Western International Securities, brokers are not currently required to recommend only the lowest cost investment options. More expensive investments can be recommended just as long as they fit a client’s risk profile, investment goals, etc. Financial advisors do not have that liberty.

A Rather Strange Debate

While proponents and critics of the proposed new rule continue to debate among themselves, there is one voice that isn’t being heard: the voice of the investor. In light of that, the entire debate is a rather strange one. Industry professionals are debating whether the interests of the client should always come first where investment decisions are made. That doesn’t seem logical. There should be no debate here.

There is near universal and not unexpected consensus among investors that their needs and best interests come first. And they are the ones investing the money. Brokers who willingly take that money while offering vaguely worded promises to grow it already have a certain measure of responsibility, whether the SEC mandates it or not. Putting client interests first is just the right thing to do.

Will the SEC get in on the fiduciary action? Only time will tell.

All the talk surrounding the DOL fiduciary rule put a lot of focus on how financial advisors make a living. We have talked about everything from feed-based services to whether financial advisors should recommend commissionable annuities or not. One thing that has been lost in all these discussions is the concept of sound retirement planning.

Consumers tend to look at financial advice in terms of how much they will pay for services rendered. Such concerns are valid, but they are not the be-all and end-all of investing. They certainly do not tell the whole story of how investments relate to retirement planning and its eventual results.

At Western International Securities, broker-dealers and financial advisors have access to a vast array of products and services along with the full support of the financial services company. As such, they have every opportunity to pursue effective retirement planning with clients. That planning involves a three-pronged approach covering the following areas:

  • Tax planning
  • Income planning
  • Estate planning.

Tax Planning

Financial advisors focusing mainly on the here and now may not necessarily spend a lot of time talking to clients about tax planning. That is the difference between making money in stocks and planning for retirement. A sound retirement plan has to account for taxes so that investors do not lose a significant amount of income to the tax man.

Failure to account for taxes in retirement can be devastating. More importantly, avoiding excessive tax liabilities is not hard to do. It simply requires a basic understanding of the tax environment and how it applies to future retirement.

Income Planning

Financial advisors are very good about explaining the benefits of things like 401(k) plans, IRAs, and annuities. So why do so few people give consideration to how they will access their retirement plans until the last few months before they stop working? Because income planning has not been part of the retirement planning process.

Income planning looks at the different ways retirees can access money saved for retirement. It accounts for monthly withdrawals, the purchase of annuities and insurance policies, and transferring assets into new investments to generate capital gains. All the options have different implications for both income and taxes. All have to be looked at in light of client circumstances.

Social Security goes along with income planning as well. Retirees have numerous options for receiving Social Security benefits, including deferring those benefits up to age 70. The point at which a retiree begins collecting Social Security will depend on other sources of income.

Estate Planning

The third component of effective retirement planning is estate planning. No, they are not the same thing. Retirement planning deals only with how an individual will meet his or her financial obligations while still alive. Estate planning goes beyond that to include asset protection and leaving a financial legacy to survivors.

Estate planning is sometimes ignored because it is too complex for a financial advisor who possesses neither the knowledge nor the experience. It is complex enough to involve discussions about healthcare, long-term care, protecting assets from inheritance taxes, and passing on an estate to beneficiaries.

It should be clear to see that retirement planning is a lot more involved than short term financial planning. It is certainly important for financial advisors to stress saving for retirement through 401(k)s and the like, but retirement planning looks beyond just putting money away to how that money will actually be used in the future. Effective retirement planning involves the three-pronged approach explained here for the purposes of guaranteeing income, protecting assets, and minimizing tax liabilities.


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