There’s a new regulation that was implemented by the U. S. Securities and Exchange Commission (SEC) on June 30 that has been overlooked by many in the financial sector and financial press because of all the other changes that took place this year (e.g., SECURE Act, CARES Act, etc.). The regulation is called Regulation Best Interest and has already gotten the nickname Reg BI.
Reg BI establishes a “best interest” standard of conduct that applies to broker-dealers when they make recommendations to clients about any securities transaction or investment strategy involving securities. This applies to rollovers from plans such as the Thrift Savings Plan (TSP) to any outside accounts, including Individual Retirement Arrangements (IRAs).
Prior to June 30, broker-dealers had to adhere to a “suitability standard” which was less rigorous than Reg BI. The previous standard simply required broker-dealers to recommend a suitable investment to their clients. Reg BI requires them to “exercise reasonable diligence, care and skill when making a recommendation to the client.” This requires that the advisor look at each investment, its risks, rewards, and costs, in light of the specific situation of each individual client.
For example, in advising a retiring fed about a rollover, a broker-dealer would want to consider such items as: 1) the TSP’s lower expenses compared to the vast majority of IRAs; 2) the greater universe of investment options possessed by IRAs; 3) whether a lump-sum distribution to pay off debts might make sense; 4) the advisability of rolling part of a distribution into a Roth IRA; 5) the greater flexibility of withdrawals available in an IRA; 6) the ability to avoid early withdrawal penalties prior to the age of 59 ½ by remaining in the TSP. And, there’s more things an adviser would want to consider based on the client’s personal situation.
Be aware that certain financial advisers are expected to adhere to the even more rigorous “fiduciary standard”. A fiduciary must always put the interests of the client ahead of their own interests and must disclose any real or potential conflicts of interest. Among those who must act as a fiduciary are Registered Investment Advisors, Certified Financial Planners and members of the National Association of Personal Financial Advisors (NAPFA).
What if you feel that your financial adviser isn’t acting according to either the best interest standard or the fiduciary standard? You can file a complaint with the Securities and Exchange Commission and/or the Financial Industry Regulatory Authority (FINRA). When you go to the SEC or FINRA websites it’s easy to file a complaint. As an added bonus, both of those websites are a treasure trove of information about investments and investing.
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