Michael Kitces chooses his moment to demand that the SEC remove two huge loopholes in the bogus RIA – the hat-switched “hybrid” adviser and the Wirehouse “financial adviser”
The founder of XPYN wants the SEC to live up to its “Merrill Lynch Rule” promise of 15 years ago to demand the most basic truth in advertising.
Michael Kitces challenges federal regulators to trick him into demanding the closure of a long-recognized loophole that could turn the world of financial product commission sales upside down.
The co-founder of XY Planning Network (XYPN), author of the financial blog “Nerd’s Eye View” and head of planning at Buckingham Strategic Wealth is ready to go online with the Securities and Exchange Commission (SEC).
He wants to challenge the semantics and principles of a rule that was actually tabled 15 years ago under political pressure.
Simply rephrasing a few lines in a rulebook could radically reorient 200,000 advisers who bypass fiduciary obligations by declaring themselves “hybrid”.
Hybrid Financial Advisors fit in both as client-focused planners and as interested brokers. Then they promise to change hats depending on whether they act as a commission broker or a fiduciary planner, who has vowed to act in the “best interests” of clients.
Critics say the bifurcation amounts to a deceptive practice. Brokers are posing simply as planners to sell more financial products, with questionable results for investor clients and an unfair competitive advantage over real financial planners.
Kitces is not here to ban hybrids, only the deceptive practices they use.
“Sometimes we want to advice from a nutritionist on our consumption of red meat, and other times we just want the butcher to sell us the best cut of meat, ”he wrote in a blog post.
“Simply put, it’s important that advisors communicate that they are advisors and that salespeople communicate that they are salespeople.”
Kitces, an influential voice in the financial services industry, has filed two rule making requests with the SEC via XYPN.
The first “would take up the 2007 rule proposal and its consideration of whether securities and financial planning services should automatically trigger the registration of a fiduciary investment advisor,” according to his blog.
The second calls on the SEC to modernize the interpretation of section 208 (c) of the Advisers Act and clarify what can constitute “investment advice”. He accuses communications agencies of using the archaic term to describe his captive sales force as a financial advisor.
An SEC spokesperson declined to comment for this article, but in its 2005 ruling on what has come to be known as the “Merrill Rule,” the SEC allowed stock brokers to suggest fee-based accounts. fixed and asset-based without being labeled “investment advisers”.
But advice was to be “only incidental” to brokerage services, and brokers had to provide the necessary descriptions and disclosures about the services they provided.
The Financial Planning Association (FPA) sued and won a decisive victory in 2005 in the United States Court of Appeals, District of Columbia Circuit.
The court ruled that the SEC could not excuse brokers who receive “special compensation” for investment advice from the Investment Advisers Act (IAA), which forms the basis of fiduciary regulation of investment advice.
It brought great joy but little change after the SEC clarified its rules. The SEC said it would review the rule, and it never did. And now the situation has only gotten worse, says the blogger.
But the Kitces bedbug approach may be what it takes, says Tim Welsh, president of Nexus Strategy.
“What Kitces is doing here is a much more logical, fact-based approach to what the FPA has tried emotionally, and I think he has a very good chance of success,” Welsh said.
Ron Rhoades, long a staunch supporter of trustees, wonders if the XYPN petitions have hit the mark.
“I am no longer convinced that a line can be drawn effectively. How can you prevent, for example, a broker working for a large mutual fund from describing that company’s mutual funds and then suggesting whether the mutual fund is suitable for an investor? ” -he declares.
Rhoades recently accepted a position with ARGI Investment Services, a $ 3.7 billion RIA and TAMP, but retained his position as Director of the Personal Financial Planning Program at Gordon Ford College of Business at Western Kentucky University.
Instead, Rhoades believes in eliminating 12 (b) 1 fees and other revenue sharing arrangements. Brokers should be remunerated by commissions that are better disclosed to investors.
He also argues that all providers of financial and investment advice are subject to the same fiduciary obligations, but realizes that current business models would need to be drastically changed.
The timing of Kitces’ advocacy may not be random.
Coincidentally, current Supreme Court Judge Brett Kavanaugh was on the appeal panel asserting the FPA’s lawsuit. Merrick Garland, then also a court of appeals judge, joined Kavanaugh in the opinion and is currently the attorney general of the United States.
Kitces, the FPA, or any like-minded organization could have a head start in any potential litigation or trigger Justice Department intervention, assuming the two former appeals court judges stay true to their initial conclusion.
He and XYPN co-founder Alan Moore also believe that Biden administration’s SEC chairman Gary Gensler has the courage to stand up to Wall Street and its assortment of fellow travelers – banks and brokers. .
Perhaps the most telling sign is Gensler’s appointment of a passionate fiduciary lawyer, Barbara Roper, to become its senior advisor.
“I have dedicated my career to making sure our capital markets work for the average investor,” she said upon her appointment.
“With investor protection being at the heart of the SEC’s mission, I look forward to bringing the same attention to the needs of individual investors in my work for the SEC. “
Roper was instrumental in thwarting a FINRA play aimed at placing RIAs under his watch and potentially erasing the RIA designation by creating a unique set of rules based on “convenience.”
Specifically, Kitces is asking the SEC to allow advisers to continue as hybrids but only wear one hat per client. Once the choice is made, there is no turning back, he says.
“If you’re going to be a hybrid, you will have to market as a broker and then choose to switch to counseling for certain clients – although if you do, once you go down the counseling route for that client, you are stuck in this path, ”he wrote.
The number of SEC RIAs hit an all-time high of 13,494 in 2020, but the Labor Department lists 218,000 advisers, and most of them would be considered hybrids.
Currently, brokers must follow SEC Best Interests Regulations, which came into effect in June 2020, while RIAs follow a fiduciary standard governed by the IAA.
Kitces wants the SEC to clarify the differences between brokers and advisers rather than crafting new regulations that put them under one roof.
The problem Kitces is fighting is one that brings out old wounds, Welsh says.
“Although the FPA won … nothing has changed. Business continued as usual, and the only result was to start the FPA’s own death spiral by alienating the industry. history will not be favorable to this decision. ”