If you are interested in investor protection, as am I, there's some good news to share.
Conflicts of interest that are imbedded in your relationship with your broker or adviser are going to get more attention from regulators. That's a good thing -- more disclosure, and where possible, a reduction or even an elimination of conflicts.
An Aug. 3 staff bulletin from the U.S. Securities and Exchange Commission, "Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest" (tinyurl.com/525d53t8), directs firms to take steps to identify potential conflicts in how they do business -- not one-time only, but on a regular basis. The goal is to have firms establish a "culture of compliance" -- I like that.
Why the focus on conflicts? It's simple. Conflicts can give firms and financial professionals an edge over a consumer. Here's an easy one: The firm is holding a sales contest incentivizing one financial product over others. If you are not aware of the extra incentives, could you be sold a product you don't need? Maybe. Maybe not.
But wouldn't eliminating the potential for this situation be a good thing? The SEC thinks so, and is making sure firms think so too, as is clear from the staff bulletin.
What might be eliminated? Potentially a "compensation or incentive program that provides significant benefits or penalties based on its financial professionals' success or failure in meeting certain benchmark, quota, or other performance metrics established by the firm," to quote the staff bulletin.
The controlling factor is simple: "a particular incentive practice is causing [the firm's] financial professionals to place the firm's or the financial professional's interest ahead of the retail investor's interest."
Again, this is all good for the investor.
You may be thinking, "How can consumers know about conflict?"
Indeed, it is not that easy to tell, unless you get help. That help is Form CRS, which is an SEC-mandated disclosure document that you can easily read and compare to another firm's CRS.
Look up your own brokerage firm or adviser online. Firms are required to post their Form CRS's (Client Relationship Summary) on their websites.
Take a few Form CRS's and compare them to each other. (If you need a Form CRS to look at, I'm happy to show you mine https://tinyurl.com/4e2r52du.)
Each firm's CRS is required to discuss conflicts. Find that section under "What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?" That's your starting point.
While the SEC staff bulletin is directed at firms, it's equally important to you as an investor. Take time to read it. Then ask your financial professional the conversation starters listed in the CRS. Evaluate the answers you receive. Then decide if you're with the firm that is best for you.
This may sound like a lot of work, but believe me, it isn't. The CRS can be no longer than four pages (for dual registrants) and no longer than two pages for other SEC regulated firms (broker-dealers and investment advisers).
Remember, advisers and brokers are working for you to achieve your investment goals, so you need to have a solid understanding of their process and what can influence it.
Finally, let me know if this topic is of interest to you. I'm thinking of putting on a few webcasts to explore this topic further. Email me at email@example.com if you'd like an invitation.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION