SEC Regulation Best Interest Does Not Have Your Best Interests At Heart

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On June 5th, 2019, the Securities and Exchange Commission (SEC) released their final draft of Reg BI, or “Best Interest” as it is called.

Regulation Best Interest: The Broker-Dealer Standard of Conduct” requires broker-dealers to act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer. This is called the “General Obligation.”

The General Obligation is satisfied only if the broker-dealer complies with four specified component obligations. Those obligations are:


1. Disclosure Obligation

The Disclosure Obligation requires broker-dealers to fully and fairly disclose material facts about conflicts of interest.

Unfortunately, studies suggest that disclosures often have the opposite effect that they were intended to have.

What is more, commission-based financial services companies continue to act as though disclosures alone exonerate their subsequent bad behavior. It is as though having disclosed it provides a safe harbor to continue terrible practices

Jesse Eisinger explains the problem nicely in his article for ProPublica entitled, “The Trouble With Disclosure: It Doesn’t Work” where he writes, “Our legal theoreticians have determined these opaque monstrosities work because someone, somewhere reads the fine print in these contracts and keeps corporations honest. It turns out what we laymen intuit is true: No one reads them… . … In complex transactions, we then must rely on intermediaries to give us advice.”

The disclosures are so confusing we have to rely on the word of advisors. However, how can we know which advisors to trust without having read the disclosures?

Anecdotally, I have had dozens of prospective clients who have said that they are only considering fee-only financial planners. I excitedly asked who else they are considering, only to find that they list a half of a dozen broker-dealers, commission-based advisors, and insurance salespeople. In my experience, it is clear that even consumers who want to understand these distinctions are confused and misled.

Additionally, there is almost no adequate method for broker-dealers to disclose all of the conflicts associated with the advice they are giving working within their commission-based environment. The advisor in front of you is only part of the picture. Before their conflicts of interest come into play, someone higher up may have already narrowed their focus in on only those items which benefit the company.

2. Care Obligation

Under the Care Obligation the SEC document suggests:

A broker-dealer should consider reasonable alternatives, if any, offered by the broker-dealer in determining whether it has a reasonable basis for making the recommendation.

The “if any” in that sentence is telling. Broker-dealers will be held accountable to consider reasonable alternatives to their high-priced offerings that are available. Therefore, broker-dealers will ensure that they have removed from their offerings any low-cost competitors. Take for example Morgan Stanley, who removed Vanguard mutual funds from their “offerings” simply because Vanguard refused to pay $850,000 in a pay-to-play shakedown. Removing Vanguard funds removed any obligation for their advisors to consider Vanguard as a reasonable alternative.

Similarly, Ameriprise has its own list of mutual fund companies who pay-to-play and whose expense ratios are excessive.

In other words, Morgan Stanley and Ameriprise removed even the possibility for their advisors to choose some low-cost funds which might be in the best interest of the client. What is worse, this move somehow satisfies the “Best Interest” legislation.

Ameriprise and Morgan Stanley are just two of the 8 broker-dealers who have asked the CFP to stop trying to define a high fiduciary standard. In my opinion, you should avoid them all.

The Care Obligation requires advisors to consider other options, but only if those other options are offered by the broker-dealer. Offering less options, in this case, provides better compliance even though it is worse service and not in the client’s best interest.

3. Conflict of Interest Obligation

The Conflict of Interest Obligation has two components. The first is to have written policies and procedures addressing conflicts of interest. The second is to “identify all such conflicts and at a minimum disclose or eliminate them.”

Neither of these obligations requires any change of behavior on the part of broker-dealers. They are already required to have written policies and procedures. They are already required to disclose all conflicts of interest. And since the Best Interest standard requires them to “disclose OR eliminate them,” there is no requirement to bother trying to eliminate them.

The SEC has been trying to crack down on disclosures that use the word “may” to conceal a payment relationship which is always happening.

For example, in the latest March 2019 ADV Part 2 for the Ameriprise Financial Planning Service (CRD# 6363) pages 17 through 32 disclose how Ameriprise gets paid from a multitude of different sources other than the client. None of the sixteen pages of disclosures are easy to read. One small section on page 21, for example, reads (emphasis added):

RiverSource and potentially other unaffiliated insurance companies may be permitted to reimburse Ameriprise Financial Services or AEIS and these entities may subsequently reimburse Ameriprise financial advisors for client/ prospect educational events and financial advisor sales meetings, seminars and training events consistent with Ameriprise Financial Services and AEIS policies, as applicable. These companies may also provide support to an Ameriprise Financial Services internal sales desk, which in turn provides support to financial advisors.

Unaffiliated fixed annuity, variable annuity and insurance companies do not provide direct client or financial advisor education or sales support, other than product training materials, product sales literature and addressing client service issues. As a result, Ameriprise financial advisors may have a greater familiarity with RiverSource products and may be more likely to sell those products.

Sentences like “these entities may subsequently reimburse Ameriprise” are what the SEC is trying to crack down on. However, this shady strategy is just one of many tools of deception that commission-based firms use. The fact that Amperiprise or another firm has to resort to dissembling language should be enough for you to avoid their services.

When you want people to understand what you are writing, you write in as low a grade level as possible. This section of Ameriprise’s disclosure is written in a 19.3 Flesch Kincaid Grade level. So if your eyes glazed over after the first few sentences and you decided not to keep reading, then the prose had its desired effect. If you bothered to read through the small portion I have quoted, I still doubt that it is clear how these payments warp the advice being given.

This small section is about 3% of the disclosures you are supposed to read in order to understand the conflicts of interest that Ameriprise advisors have because of how Ameriprise is paid.

However, by providing you with the opportunity to read this, the Conflict of Interest Obligation has now been satisfied and they can freely recommend that you buy their annuity offerings.

By comparison, Marotta Wealth Management’s ADV Part 2 contains our fee schedule and then discloses:

As fee-only financial planners, we receive no other form of compensation.

We believe this policy helps mitigate the conflict of interests inherent when a firm receives compensation based on the sale of specific securities or investment products. We do not receive any payments or commissions from fund or insurance companies. Our only compensation is from the clients we serve.

To find a fee-only financial advisor in your area, visit the National Association of Personal Financial Advisors (NAPFA).

4. Compliance Obligation

According to the SEC, “under the Compliance Obligation, a broker-dealer must also establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.” The SEC claims that “Regulation Best Interest establishes a standard of conduct under the Exchange Act that cannot be satisfied through disclosure alone.” But as we have seen, there are few if any significant requirements placed on broker-dealers as a result of Regulation Best Interest.

When you hear “regulations” and “compliance,” you should hear “disclosures” and “paperwork.”

Having a written policy that requires giving clients disclosures that they will never read nor understand satisfies the SEC’s Compliance Obligation. It also does nothing to help any actual consumers.


Oddly enough, the SEC document never defines what is meant by the General Obligation’s term “best interest.” Previously, they allowed broker-dealers to lower themselves to the suitability standard. Now, they effectively renamed this standard “best interest,” which seems to have just given broker-dealers a better marketing term. The SEC even acknowledges this shortcoming in the document when they write, “A variety of commenters offered suggestions on … whether the standard should define ‘best interest.'” Sadly the SEC did not accept the challenge.

I can easily see a broker-dealer selling investment products arguing that investing in their fee-laden products is in the client’s best interest because the client needs to be saving and investing. They do not concern themselves by the existence of superior options; those options are not part of this particular broker-dealer’s offerings. They also do not bother to see things from the consumer’s point of view. If they did, they might notice the cost incurred by the client from being trapped within this broker-dealer’s world.

Under this legislation, the term “Best Interest” is a very low bar of compliance.

The SEC passed the regulations by a 3-1 vote as Melanie Waddell reports for ThinkAdvisor:

SEC Commissioner Robert Jackson, a Democrat, dissented, stating that his hope was that the rules the SEC announced Wednesday would leave “no doubt that investors come first. Sadly, I cannot say that. Today’s rules maintain a muddled standard. Today’s rules simply do not require that investors’ interests come first.”

Jackson stated that he couldn’t vote for any of the four prongs of the plan put forth Wednesday. Neither Reg BI nor the advisor recommendations “requires Wall Street to put investors’ interest first,” Jackson said.

I agree with Jackson.

I’ve heard it said that whatever the government titles a regulation, you can assume that at least that part is not true. The Affordable Care Act resulted in health insurance that was not affordable. Regulation Best Interest means that broker-dealers don’t have to act in your best interest.

The regulation is fraught with difficulties, not the least of which is that it gives broker-dealers who don’t have to comply with fiduciary standards the priceless marketing term “Best Interest.” Never mind that the SEC’s definition of “Best Interest” doesn’t actually mean what is best for you. And never mind that a fiduciary is held to a much higher standard. Fiduciaries will have to continue to struggle to explain to consumers that they are better than “Best.” They will have a difficult time trying to explain why “Best” isn’t even good enough.

To demonstrate this misleading terminology I almost titled this article, “Who Would You Rather Hire: A Fiduciary Or An Advisor Who Has Your Best Interests At Heart?”

From a marketing standpoint the answer is clearly “I would rather hire an advisor who has my best interests at heart.” Alas, a fiduciary is the individual who actually puts your best interests first. A fiduciary is obligated to act in a client’s best interest in an ongoing relationship. A broker-dealer subject to Regulation Best Interest is not actually required to do either of these things.

I am absolutely certain that broker-dealers will take great advantage of the term to confuse and attract clients to their sub-par-standard service model.

It is ridiculous that every random person who acts as an executor or as a trustee or under a power of attorney is held to the fiduciary standard, and yet we allow financial professionals to hide in a lower legal requirement, not meet a fiduciary standard, and call it “Best Interest.”

Photo used here under Flickr Creative Commons

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)