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October 2, 2018
The rules governing registered investment advisors and their fiduciary obligation to retail investors is undergoing change in New Jersey. Roughly 2,100 broker-dealers and 205,000 licensed investment advisors are based in New Jersey. The new governor of New Jersey, Phil Murphy has an extensive background in the securities industry, working in finance at Goldman Sachs for over 20 years. He decided on the 10-year anniversary of the collapse of Lehman Brothers and the 2008 global financial meltdown to introduce a new fiduciary standard for registered investment advisors.
The rule would mirror the Department of Labor Fiduciary Duty Rule which was recently turned down in federal court. The 5th Circuit ruled that the Department of Labor exceeded its authority in enacting the fiduciary rule that would have made it mandatory for brokers to act in their client’s best interests when investing in retirement accounts. The Trump Administration has not decided to appeal the court ruling or enforce the fiduciary standard for brokers created during the Obama Administration.
Presently in New Jersey, as with most of the states in the union, there is no uniform standard for financial advisors and what many investors fail to realize is that not all financial professionals working in the securities industry have a fiduciary duty to act in their client’s best interest. Investment advisors who are registered with the Securities Exchange Commission have a fiduciary duty. This requires the investment advisor to put their clients interests above their own and disclose any potential conflicts of interests. This should include commissions and fees investment advisors are receiving on the products they recommend.
The New Jersey Bureau of Securities in conjunction with Governor Murphy are leading the charge on implementing the new uniform fiduciary standard for broker dealers. The confusion for investors that the New Jersey Bureau of Securities is seeking to erase is that an investment advisor can be a broker with no fiduciary duty and an investment advisor as well. If the investment advisor is working trade to trade earning compensation on the commissions generated from each trade without having discretionary trading authority over the account then the investment advisor is probably acting as a broker without a fiduciary duty to the investor. In this instance the advisor must use a suitability analysis per FINRA Rule 2111. This requires the broker to offer advice after considering investment profile and investment objectives such as risk tolerance, age, income needs, tax status and overall financial profile. A stockbroker with a Series 7 and 63 license who is a FINRA member employed or associated with a broker dealer must provide suitable investment decisions and run a suitability analysis when making investment decisions.
If the investment advisor has a Series 65 license and is licensed with the SEC there is per the Investment Advisors Act of 1940 a fiduciary duty to put client’s interest above their own. The duty is more expansive then the above defined FINRA Rule 2111 governing suitability. Here an investment advisor should disclose commissions, warn clients of material market events and provide more oversight in creating a customized asset allocation for the investor.
The New Jersey Uniform Fiduciary duty regulation would be drafted by the New Jersey Bureau of Securities and is not set to appear until October 15, 2018. What the regulation will call for in terms of disclosures and standards for brokers toward investors is still unclear.