Financial Engines and Edelman Financial Services, which have merged to become the nation’s largest RIA, joined a push to have RIAs write comment letters to the Securities and Exchange Commission’s (SEC) about its proposed rule overhauling broker-dealer conduct.
The two firms announced their endorsement of the ‘Raise Your Voice’ initiative in a conference call with reporters, alongside $3.5 billion RIA PagnatoKarp and RIA compliance consultancy MarketCounsel. The Institute for the Fiduciary Standard, along with five other firms, launched the campaign on June 29.
An open comment period for the 900+ page SEC rule proposal closes on August 7.
‘It is Financial Engines’ belief that a single unified fiduciary standard for all investment recommendations, both in the workplace and retail markets, would establish a regulatory framework in which recommendations would always be required to be in the customer’s best interest,’ Financial Engines CIO Chris Jones said.
Private equity firm Hellman & Friedman is merging Edelman, a network of in-person advisors serving the mass affluent, and Financial Engines, which manages 401(k) accounts and has a smaller footprint of advisors, in a deal valued at around $3.02 billion. If Financial Engines shareholders approve the deal, the ensuing RIA will have around $191 billion in assets under management – and a new level of clout in the industry.
Edelman Financial Services co-founder and executive chairman Ric Edelman has been sharply critical of the SEC’s proposal, which will introduce a ‘regulation best interest’ standard for broker-dealers to mitigate or eliminate their conflicts of interest while dispensing financial advice and making investment decisions.
Edelman previously told Citywire the proposal does not go far enough to protect investors. RIAs are required to act in their clients’ best financial interests when making investments and giving advice, while broker-dealers are currently allowed to recommend investments suitable to their clients’ goals but which may be conflicted by brokers’ incentives to receive commissions for selling certain funds and products.
‘We believe a weak in-name-only best interest standard would actually prove to be more detrimental to retail customers than the status quo,’ Jones said. ‘It would allow additional marketing cover for conflicted service providers to act against the best interest of their clients.’
Jones said the SEC’s proposal would be stronger if it clarified definitions of ‘best interest’ and ‘recommendations’ so it could consistently apply to broker-dealers.
The proposal also stands to create a new relationship summary document that would apply to broker-dealers and RIAs. Both classes of advisors would be required to outline their duties and standards of care, as well as some conflicts of interest. That element of the proposal came under scrutiny last week after retail investors gave SEC officials critical feedback on the document during a roundtable discussion.
SEC chairman Jay Clayton has staunchly defended the proposal. ‘In suitability, if you come up with two investments that are suitable for your client...there are people who will argue that you are allowed to look at which investment makes you, the broker, more money and put the client into that investment,' Clayton said during a june town hall with retail investors in Atlanta.
‘Under our new standard, you will not be allowed to do that. You cannot put your interests ahead of your clients’ interests.’
The proposal may face some logistical hurdles after commissioner Michael Piwowar stepped down on July 7, leaving the commission with four members. The first confirmation hearing for Piwowar’s replacement, Republican lawyer Elad Roisman, is scheduled for July 24.
Two of the remaining commissioners, Democrat Robert Jackson and Republican Hester Pierce, cast their votes to advance the proposal to public comment with trepidation. Democrat Kara Stein, who is departing the commission before the end of 2018, cast the lone ‘no’ vote.
‘Right now, there’s exactly one vote for the proposal,’ said Institute for the Fiduciary Standard president Knut Rostad. ‘Our sense is that Clayton believes that he has threaded the needle between the two sides by doing what he’s done in these 900 pages. He’s very confident he’s done the right thing.’