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Looking for Clarity

Written by Brandon Grundy, CFP®.

Sometimes when doing research for these posts I stumble across an information goldmine. Case in point, the Ethics Unwrapped project from the McCombs School of Business at the University of Texas at Austin.

I was searching the web for a concise definition for "conflict of interest" and found this collection of short videos and educational resources. The content covers personal and professional ethics and does so in a way that's fun and easy to digest. If you have some time and are curious, I'd highly recommend perusing the website (a link follows at the end of this post).

Conflict of interest: A conflict of interest arises when what is in a person's best interest is not in the best interest of another person or organization to which that individual owes loyalty – From Ethics Unwrapped

As you no doubt have heard me say before, various agencies of the federal and state governments have been working to make financial relationships and the process of investing more transparent. They've had limited success. There was the so-called "Fiduciary Rule" from the Department of Labor, which sought to hold advisors to a higher ethical and legal standard when working with retirement accounts. That rule ultimately failed at the last minute early in 2017.

The latest rulemaking attempt comes from the Securities and Exchange Commission with its "Regulation Best Interest" (who names this stuff?). The regulation seeks to reduce conflicts of interest by increasing transparency around the differences between broker-dealers, investment advisors, and fee-only folks like your humble financial planner.

A critical piece of the proposed regulation is the Client Relationship Summary (CRS), an up to four-page document that investors would receive prior to starting a new relationship with a broker, advisor, or planner. The idea is to show a side-by-side comparison of the services available, conflicts of interest, details about fees, and other information. The goal being to help investors make better informed decisions about which service best fits their needs.

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This sounds reasonable and well-intentioned. But I'm sure we'd all agree that while more disclosure and transparency is a good thing, it does no good at all if the average investor can't understand what they're reading.

As part of its process, the SEC hired an outside consultant, the RAND corporation, to gauge the effectiveness of the CRS. It turns out that over 2/3rds of investors polled said the CRS would help them make better informed decisions about different investment services. It would also help them understand the different types of conflicts of interest they might encounter when working with different types of advisors.

But the consultant ultimately found a big problem when interviewing those who were polled. It seems investors were confused about the key topics they had just reported the document helped them to understand. They didn't understand the key differences between brokers and advisors, for example. They were also confused about the differences in fees and conflicts of interest, and the meaning of the term "fiduciary". This is ironic because how could you make better informed decisions without understanding these topics?

The problem, as I've said in other posts, is that this stuff is complicated. And while people are smart and intuitive, industry disclosures, including the proposed CRS, are written by industry insiders and contain lots of jargon. They are also usually one-size-fits-all documents trying to cram a huge industry worth of information into a relatively small space. The result is predictable and ultimately unhelpful in educating the investing public.

We'll see what the SEC does with this proposed regulation. As an industry we need to do a lot better at clearing up waters we've worked for decades to muddy. Ultimately, I think it's a good thing to give investors access to anything that helps them to be better informed. Hopefully a more simplified and clearer version of the CRS will be a good start.

Here's a link to Ethics Unwrapped

https://ethicsunwrapped.utexas.edu/glossary/conflict-of-interest

Here's the Rand Corporation's report if you're looking for a little light reading...

https://www.sec.gov/comments/s7-07-18/s70718-4628415-176399.pdf

Have questions? Ask me. I can help.