May 1, 2018
Thank you for the opportunity to submit comments regarding the proposed regulations. I appreciate the commissions attempt to improve financial advice.
I would submit that the first and most important method to improve the quality of advice given requires an often unaddressed area of financial markets regulation. Our industries educational requirements. They are quite low considering the complexity of financial markets. Recently in his article "How Financial Advice Should Work" (5/1/2018)John Rekenthaler, VP of Research for Morningstar suggested that we should have a "tiered system" for financial advice. In tier one, the group would have educational requirements that are similarly stringent to the Chartered Financial Analyst designation from the CFA Institute. The second tier would have lower educational requirements but with higher ethical standards than today. This thought coincides with research from the Chicago Booth School who demonstrated in a statistically significant way that generally speaking Advisors don't give conflicted advice, but are instead "Misguided". Of the roughly 4,000 advisor's studied and their 500,000 clients, they found advisors pursued the wrong "best practices" both on client portfolio's and their own, including into their own retirement. Thus they caused themselves as much harm as they did for the client, suggesting they did not know better. Therefore even enhanced ethical requirements would not solve the issues around client harm.
Only with improved education and the proper tools can we raise the industries quality of advice. Your rule attempts to make clear the roles played by brokers and RIA's both through Form CRM and the proposed change to titles. However a client can have perfect clarity on the roles, fee's and best fit for their situation and still be harmed if the advisor's educational bar is low enough that they unwittingly harm their clients.
The issue is further exasperated when we consider how many new brokers enter the industry without themselves understanding the tools and capabilities of their own firms. By the time they do and can assess if that is the proper fit, they have to risk financial ruin to change the situation for themselves and clients since the commission and FINRA seem unwilling to address both "client ownership" issues and the use of regulation interpretation by firms to limit Financial advisors ability to properly serve clients.
Copyrighted material redacted. Author cites:
Linnainmaa, Juhani T. and Melzer, Brian and Previtero, Alessandro, The Misguided Beliefs of Financial Advisors (December 15, 2017). Kelley School of Business Research Paper No. 18-9. Available at SSRN: https://ssrn.com/abstract=3101426 or http://dx.doi.org/10.2139/ssrn.3101426