Thursday, April 25, 2019

New Jersey Fiduciary Proposal

After soliciting initial comments, New Jersey has issued its draft fiduciary regulation.  The draft proposal makes clear that financial advisers will have duties of care and loyalty to clients and that mere disclosure may not be sufficient to satisfy the duty of loyalty.  This matters because many registered investment advisers now attempt to satisfy their fiduciary duties simply by disclosing conflicts and instances where they will act against client interests.

Consider the SEC's recent share class disclosure settlement.  Firms had been steering client assets into more expensive share classes because those classes paid the firms more money than less expensive share classes.  The SEC deemed these practices "fair" so long as they were disclosed to clients:

“An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments,” said Stephanie Avakian, co-director of the SEC’s enforcement division.

The words "unfairly exposed" strain under their burden there.  It's an odd notion of fairness which allows a fiduciary to fleece clients so long as some document contains the disclosure.  

New Jersey now looks to take a different approach.  Although disclosure makes sense for many securities law issues, it fails to meaningfully protect investors in their relationships with financial advisers.  Vast swaths of the public are financially illiterate.  They need help because they don't understand markets, portfolio allocation strategies, how fees impact portfolios over time, and a host of other issues.  People hire advisers because they want someone else to think about and handle these issues.

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