Friday, November 2, 2018

New Recommendations from Investor Advisory Committee

The SEC's influential Investor Advisory Committee has just released new recommendations for the SEC as it continues to move forward with its effort to raise the standard for investment advice given to retail customers.  Although the entire recommendation is worth reading, it highlights the special importance of making sure that account-type recommendations fall within the rule.  As it currently stands, the proposed regulation does not apply to initial recommendations about what kind of account a customer should select.

The Committee described the issue's critical importance:

Some of the most important decisions investors make arise at the outset of the relationship, before they receive recommendations regarding specific transactions. These include decisions about whether to roll money out of a retirement account and into an IRA, what type of account to open (where the firm has more than one account type available), and the scope of services to be provided. Those central decisions, generally made at the beginning of a brokerage or advisory relationship, set up the contours of the relationship. They will often have a far greater impact on the investor than subsequent recommendations regarding which specific securities to invest in.

Rollover recommendations, for example, are frequently provided at a critical juncture in an investor’s life – retirement – and are often irrevocable decisions. Similarly, while some investors (including those who trade frequently) may be best served by paying an asset-based fee, others (including buy-and-hold investors who rarely trade) may be better served by paying transaction fees. Decisions about which type of account to open have the potential to greatly affect their costs. Moreover, both rollover and account type recommendations are recommendations of an “investment strategy involving securities” that can have substantial potential long-term impacts on investors. And both types of recommendations inherently involve potential conflicts of interest, making it critical that advisers and brokers put their clients’ interests ahead of their own in making such recommendations.

Early account-type decisions will likely have significant impacts on the range of options available later.  The risk is that advisers eager to gather assets to manage will cause investors to pay higher fees and experience lower returns by drawing them into the wrong account type for their situation.  Consider a choice facing a retiree with a buyout offer for a defined-benefit pension.  If the retiree asks a financial adviser for advice, the advice should be in the best interest of the retiree--not the financial adviser.  The right advice might be for the retiree to keep the pension and not move assets to the financial adviser.  It's hardly acting in a person's best interest to draw them into a decision that isn't in their best interest and then act in their best interest once bad advice has caused them to surrender a stable pension.   

 

https://lawprofessors.typepad.com/business_law/2018/11/new-recommendations-from-investor-advisory-committee.html

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