​Brokerage accounts were upgraded because for decades that is where the bad stuff happened. 

 

 

Here are the BIG THREE protections inside brokerage accounts.

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You are protected from:

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1) Hidden fees and conflicts:

 

They have to get an informed decision from the customer after making sure the customer has ALL material information- as defined by the retail customer.

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2) Lack of a fair comparison with the advisory account:

 

They have to make an explicit comparison to purchase the same security in the advisory account and let the client choose between advisory and brokerage. Reg BI specifically says Wall Street can’t just approve the brokerage share class, they MUST approve both advisory and brokerage and let the client choose.  Once you see the difference in compensation that a wealth manager gets when they suggest brokerage vs. advisory, a lightbulb will go off.  Unfortunately, in too many cases, Wall Street doesn't give the customers a comparison. 

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3) Placement fees and extra costs:

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Inside brokerage accounts, they have to use the cheapest share class even if the client said it was okay to buy a more expensive share class.  This makes placement fees prohibited. 

 

A bit of background on brokerage accounts. 

 

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Brokers get paid by the people selling the fund and have an incentive to sell the funds that pay them the most. This conflict is what damages investors and that incentive is - in too many cases- still going on. The good part is that the rule gives regular investors tremendous power. The person who decides if they were given enough information is the retail investors, if you think they told a half-truth, you are the only vote that matters.  

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Reg BI was passed because for decades, the same wealth manager could sell customers products in advisory accounts where the wealth manager was a fiduciary or a brokerage account where the wealth manager was a used car salesmen. There was no fiduciary responsibility  in brokerage accounts and when a customer bought something and it went bad, the customer found out in arbitration that they had no recourse. 

 

The customer never knew when the wealth manager switched hats from Fiduciary to used car salesman.  They passed Reg BI because of the mismatch in obligations owed to retail customers between "bad" brokerage accounts and "good" advisory accounts. 

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In 2016, The SEC first tried to make brokerage accounts Fiduciaries like advisory accounts but the industry fought it. The Fiduciary rule was thrown out by the Fifth Circuit. Here is what they said.

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In the 2018 decision, the Fifth Circuit ruled that the 2016 rule strayed too far from the common-law definition of the term fiduciary, which hinges on the existence of a relationship of “trust and confidence” with the client. The court concluded that agents who merely sell products to their clients do not have this relationship.

In 2020, Brokerage accounts were upgraded by President Trump to  Regulation Best Interest which provides the same protections to customers as Fiduciaries. 

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A good part of brokerage accounts:

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​Brokerage accounts are not all bad. They can make sense when you buy a single stock or bond for a one time reasonable commission and hold that stock or bond for a long time. The stock or bond has no ongoing administrative fee and the broker gets 0 revenue after the initial purchase.  

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Here is the rule itself. 

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Brokerage accounts have to be compared to advisory accounts for every recommendation. 

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(Reg BI rule Page 34): Recommendations of account types,  We are modifying Regulation Best Interest to expressly apply to account recommendations including, recommendations to open a particular securities account (such as brokerage or advisory)

Expressly :- Explicit, stated clearly and in detail, leaving no room for confusion or doubt.

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If you are a dually licensed financial professional, you need to make a best interest evaluation taking into consideration the spectrum of accounts you offer (i.e., both brokerage and advisory accounts, subject to any eligibility requirements such as account minimums).[Rule page 10)

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