The Long-Term Impact of Reg BI

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Reg BI continues the main differentiation between traditional Wall Street brokers and Registered Investment Advisory (RIA) firms, which is good for my business. But the SEC offered little help for consumers. It affirmed their commitment to Wall Street over Main Street.

Brokers versus RIAs

The simple difference is compensation. Brokerage firms get money for recommending products. That may sound harmless, but a strong sales culture impairs investors. At the very least, it limits the product offerings into two broad categories: those that pay commissions and those that don’t. Just try to buy an inexpensive Vanguard index fund through your local broker.

Complexities arise from other practices. How does an investor decide when his broker offers a bond for his portfolio? The rate and issuer sound nice, and there’s no sales commission. The broker’s firm serves as agent for some transactions and principal in others; what does that even mean?

Some brokerage firms buy and sell stocks and bonds for their own profit. How would you feel to learn that a stock you bought came from the broker’s own portfolio? Essentially, their “expert” traders may be selling at the same time you are buying.

RIAs have fiduciary responsibility for the portfolios they manage. The relationship isn’t a “one and done” sales transaction. It’s a level of service beyond the brokerage model … it’s not that everything brokers do is bad, but more that many potential conflicts aren’t even allowed to RIA firms.

Why are bad practices allowed?

The fact that they have historically been allowed is one reason they are still allowed. Wall Street argues that brokerage firms have served millions of clients for dozens of years. If its behavior is so awful, why do customers keep coming back? How have firms survived all these years?

Those seem valid points. But I see two large groups who choose the brokerage model. One group is highly-informed, and they deliberately seek trading platforms and services offered through a brokerage model. They understand what they are buying.

The second group – far larger– doesn’t see or fully understand conflicts, recommendations, charges, or alternatives. If they truly understood, they’d be concerned.