Wealth Management
(Washington)
The SEC received over 6,000 comment letters in its public comment period for its new best interest rule. The regulator is currently reviewing those, but the big question is what is the rule’s implementation timeline? A top director at the SEC recently declined to comment on a timeline, saying “We are in the process of going through comments to see what changes if any we should be recommending”, but refused to give a date.
FINSUM: The anecdotal evidence and chatter we are hearing is that the SEC is going to try to move quickly to finalize and implement this rule. Stay tuned.
(Washington)
In a sign of just how wide-reaching the coming SEC Best Interest rule truly is, FINRA has just acknowledged that the Suitability Rule might be on the chopping block. FINRA’s Suitability Rule requires that brokers choose a product suitable for their client, but is a weaker standard than the proposed BI rule. “If [Regulation Best Interest] is adopted, then we would need to look at our rule set to see if any changes are appropriate … For example, is our suitability rule appropriate? But that is down the road. We need to see how Reg BI is adopted”, says Robert Cook, the CEO of FINRA.
FINSUM: This is not really a surprise, as the BI rule would basically make the Suitability Rule redundant. However, it is certainly a wake up call that things are changing quickly.
(New York)
The fiduciary rule has been dead for about six months now—much to the delight of most advisors. However, in what we feel was an inevitable development, the rule is starting to make a comeback. With the new SEC best interest rule getting a lot of negative feedback from all sides, it seemed very likely that states would take matters into their own hands and development states-level fiduciary rules. That is exactly what is happening. New Jersey is now working on a fiduciary rule of its own and it seems likely many other states will follow suit. If that transpires, advisors could face a patchwork of national rules that would make compliance a nightmare.
FINSUM: This was inevitable. States feel like the SEC’s rule is not as rigorous in its protections as the DOL rule was, and thus they feel they need to take matters into their own hands.
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(New York)
One of the very interesting aspects—which is thoroughly underreported—is that despite the rise of ETFs, mutual funds have held a major portion of market share in the advisor allocation business. One of the trends which has emerged is that the growth of ETFs has not really cost mutual funds as much as one would expect. Rather, advisors have just started to use them in different ways. ETFs are seen as better for broad passive exposure, but when it comes to active management, mutual funds are seen as the superior choice. This helps explain why smart beta and other forms of active ETFs have been relatively unsuccessful.
FINSUM: It is not mutual funds that have suffered from the shift to ETFs, rather it has been variable annuities and individual stocks. This is a quite a positive development for the asset management industry, in our opinion.
(Washington)
Brokers pay attention—a major loophole in the SEC’s best interest rule has just become apparent. One of the industry’s big complaints about the BI rule has been that it seeks to govern the use of the “advisor” title. Well, until now it seems that everyone had missed a key loophole in the rule. When the SEC drafted it, it allowed for dually-registered advisors/B-Ds to call themselves advisors even when they are carrying on brokerage business. 61% of registered reps work at dually-registered firms, meaning this aspect of the rule is mostly a moot point for the majority of advisors. According to Michael Kitces, famed advisor and wealth management commentator, “The rule literally doesn’t apply to most advisers”.
FINSUM: This is one of those bombshell realizations that seems to happen when a new rule is 1,000+ pages long—you miss things.
(New York)
At the end of August, the IRS closed the door on the numerous high-tax states that were trying to classify their residents’ taxes as charitable gifts so as to make them deductible. That moved slammed the door of options shut for New York and New Jersey residents. However, the IRS didn’t close the door to other workarounds, and Connecticut apparently has a favorable model that specifically applies to pass-through entities. The workaround allows full deduction to the previous tax level for users through an income credit system on taxes paid.
FINSUM: One wonders if the IRS will just move on to shutting these programs down or whether this is a model that other states can build on.