WEBVTT 00:00:00.000 --> 00:00:01.560 So if you've ever tried to get some help with 00:00:01.560 --> 00:00:04.080 your finances, you know, hire someone to help 00:00:04.080 --> 00:00:06.419 you plan for retirement or just figure out what 00:00:06.419 --> 00:00:08.640 to do with your savings, you've probably hit 00:00:08.640 --> 00:00:11.339 that wall of confusion. There were just so many 00:00:11.339 --> 00:00:14.160 titles. You've got brokers, financial planners, 00:00:14.400 --> 00:00:16.679 advisors, agents. They all sound kind of the 00:00:16.679 --> 00:00:19.739 same. They do. But they operate under completely 00:00:19.739 --> 00:00:22.359 different rules. Wildly different. Our mission 00:00:22.359 --> 00:00:26.699 in this deep dive is to really cut through all 00:00:26.699 --> 00:00:29.719 that noise. This is for you, the learner. who 00:00:29.719 --> 00:00:32.939 really wants to know, what do these titles legally 00:00:32.939 --> 00:00:36.420 mean? And whose interests are they actually required 00:00:36.420 --> 00:00:39.280 to serve when they give you advice? Right. We're 00:00:39.280 --> 00:00:41.119 going to define the roles. We're going to break 00:00:41.119 --> 00:00:43.979 down how they get paid because, let's be honest, 00:00:44.219 --> 00:00:45.960 following the money explains almost everything. 00:00:46.140 --> 00:00:48.479 It really does. It's the key. And most importantly, 00:00:48.600 --> 00:00:50.840 we're going to explore that critical legal standard, 00:00:51.079 --> 00:00:54.420 the fiduciary duty, that determines their real 00:00:54.420 --> 00:00:57.979 binding obligation to you. And our sources for 00:00:57.979 --> 00:01:01.189 this are... Pretty comprehensive. We're drawing 00:01:01.189 --> 00:01:03.549 really heavily on the official definitions and 00:01:03.549 --> 00:01:05.989 the distinctions that U .S. regulators make about 00:01:05.989 --> 00:01:08.129 financial advisors, about what they call registered 00:01:08.129 --> 00:01:10.989 investment advisors or RIAs. Okay. And we're 00:01:10.989 --> 00:01:12.530 also digging into the whole world of how they 00:01:12.530 --> 00:01:15.769 get paid, looking at institutional fees, and 00:01:15.769 --> 00:01:18.049 even how other countries try to tackle this exact 00:01:18.049 --> 00:01:20.909 same problem. Let's just start with the core 00:01:20.909 --> 00:01:23.090 problem right out of the gate because I think 00:01:23.090 --> 00:01:25.769 it confirms that initial suspicion that a lot 00:01:25.769 --> 00:01:28.189 of people have. Experts call the relationship 00:01:28.189 --> 00:01:30.709 between... a client and an advisor the principal 00:01:30.709 --> 00:01:34.430 agent problem yeah that's the finance jargon 00:01:34.430 --> 00:01:37.209 for a classic conflict of interest that's really 00:01:37.209 --> 00:01:39.650 baked into the system from the start the client 00:01:39.650 --> 00:01:41.829 you you're the principal right I need guidance 00:01:41.829 --> 00:01:44.129 you need guidance you need honest advice the 00:01:44.129 --> 00:01:46.269 advisor is the agent who's supposed to act for 00:01:46.269 --> 00:01:48.849 you the problem is that the agent the advisor 00:01:48.849 --> 00:01:51.909 has information you don't And they have conflicts 00:01:51.909 --> 00:01:54.049 of interest, like getting a bigger payout for 00:01:54.049 --> 00:01:56.209 selling one product over another that you might 00:01:56.209 --> 00:01:58.750 not know about. So there's an imbalance. A huge 00:01:58.750 --> 00:02:01.269 imbalance. And it means the advice they give 00:02:01.269 --> 00:02:04.170 might be, you know, technically OK, but it might 00:02:04.170 --> 00:02:06.310 be designed to make them the most money, not 00:02:06.310 --> 00:02:09.169 you. And that can lead to some really dishonest 00:02:09.169 --> 00:02:12.110 advice or even misconduct. So knowing that conflict 00:02:12.110 --> 00:02:14.789 is built in is, I guess, the first step to protecting 00:02:14.789 --> 00:02:16.909 yourself. And that's why we need to know the 00:02:16.909 --> 00:02:18.650 difference between the titles and, of course, 00:02:18.729 --> 00:02:21.240 the paycheck. Let's jump into that structure. 00:02:23.479 --> 00:02:27.120 OK, so at the most basic level, a financial advisor 00:02:27.120 --> 00:02:29.659 or advisor, we'll get to the spelling, is just 00:02:29.659 --> 00:02:32.419 a professional who gives financial services based 00:02:32.419 --> 00:02:35.259 on your situation. Right. But financial services 00:02:35.259 --> 00:02:38.180 is such a huge, massive umbrella. Yeah, it's 00:02:38.180 --> 00:02:40.560 everything. Exactly. It could mean one person 00:02:40.560 --> 00:02:42.879 is creating this huge, comprehensive life plan 00:02:42.879 --> 00:02:44.879 for you, covering taxes, your estate, everything. 00:02:45.280 --> 00:02:47.319 Or it could be someone whose main job is just 00:02:47.319 --> 00:02:49.719 to sell you one thing. Like life insurance. Life 00:02:49.719 --> 00:02:51.979 insurance or a specific type of annuity. And 00:02:51.979 --> 00:02:54.340 that range of what they do dictates what kind 00:02:54.340 --> 00:02:56.560 of qualifications they have to have. Now, here's 00:02:56.560 --> 00:02:58.479 a distinction that I think really trips people 00:02:58.479 --> 00:03:01.500 up, especially in the U .S. Advisors are generally 00:03:01.500 --> 00:03:04.379 registered, not licensed, at least not in the 00:03:04.379 --> 00:03:07.520 same way, say, a doctor or a lawyer is licensed. 00:03:07.840 --> 00:03:10.930 That's a really crucial nuance because. Licensing 00:03:10.930 --> 00:03:13.830 usually has to do with selling a specific product. 00:03:14.110 --> 00:03:17.110 So, for example, someone might have an insurance 00:03:17.110 --> 00:03:20.430 license that lets them sell you insurance. But 00:03:20.430 --> 00:03:22.289 if they want to sell you something more complex, 00:03:22.530 --> 00:03:25.509 like a variable annuity, which is legally a security, 00:03:25.909 --> 00:03:29.509 that same licensed agent has to also pass the 00:03:29.509 --> 00:03:32.449 Series 7 exam and be registered to sell securities. 00:03:33.159 --> 00:03:35.020 So they're stacking credentials based on what 00:03:35.020 --> 00:03:36.860 they're allowed to sell you. Exactly. And they 00:03:36.860 --> 00:03:38.460 register with different regulators depending 00:03:38.460 --> 00:03:40.219 on what they're doing. But they might still just 00:03:40.219 --> 00:03:42.580 call themselves a financial planner. Even if 00:03:42.580 --> 00:03:44.740 they're basically a salesperson. Correct. The 00:03:44.740 --> 00:03:47.219 title itself doesn't have a unified legal definition, 00:03:47.300 --> 00:03:49.240 which is a huge part of the problem we're trying 00:03:49.240 --> 00:03:51.900 to unpack here. And, okay, you brought it up, 00:03:51.919 --> 00:03:53.960 so let's just touch on the spelling thing. Advisor 00:03:53.960 --> 00:03:57.050 with an O -R. Versus advisor with an E -R. It's 00:03:57.050 --> 00:03:59.030 one of those little quirks that, you know, only 00:03:59.030 --> 00:04:00.770 people in the regulatory world would probably 00:04:00.770 --> 00:04:03.270 notice, but it's interesting. One textbook we 00:04:03.270 --> 00:04:06.189 looked at suggests that advisor with an E -R 00:04:06.189 --> 00:04:09.030 is mostly used when you're talking about the 00:04:09.030 --> 00:04:11.449 law itself. Like the Investment Advisors Act 00:04:11.449 --> 00:04:14.979 of 1940. Precisely. Whereas advisor with an R 00:04:14.979 --> 00:04:17.660 is what you see more when talking about the person, 00:04:17.740 --> 00:04:19.800 the practitioner. You wouldn't say you have an 00:04:19.800 --> 00:04:22.040 advisory practice. You'd say you have an advisory 00:04:22.040 --> 00:04:23.939 practice. Right. So it's a subtle split. You'll 00:04:23.939 --> 00:04:27.000 see both, which just adds to the confusion. But 00:04:27.000 --> 00:04:30.220 no matter how they spell it, the real truth comes 00:04:30.220 --> 00:04:33.060 down to how they're paid. Yes. The compensation 00:04:33.060 --> 00:04:36.360 model is everything. It reveals the entire conflict 00:04:36.360 --> 00:04:39.180 structure. Let's break down the six main ways 00:04:39.180 --> 00:04:42.100 they get paid, which really boil down to commissions, 00:04:42.319 --> 00:04:45.459 fees, or some kind of mix. Let's start with the 00:04:45.459 --> 00:04:47.420 cleanest ones, the ones with the least built 00:04:47.420 --> 00:04:50.500 -in conflict. Number one, the hourly fee. Simple 00:04:50.500 --> 00:04:53.240 enough. It's the purest way. You pay them for 00:04:53.240 --> 00:04:55.079 their time and their expertise, just like you'd 00:04:55.079 --> 00:04:57.879 hire an accountant or a consultant. Their incentive 00:04:57.879 --> 00:04:59.879 is just to give you good advice for the time 00:04:59.879 --> 00:05:01.959 you're paying for. And related to that is number 00:05:01.959 --> 00:05:06.120 two. The flat fee. Yeah. A set price for a specific 00:05:06.120 --> 00:05:09.899 project. It might be, say, $3 ,500 for them to 00:05:09.899 --> 00:05:12.839 do an annual review of your portfolio. Or maybe 00:05:12.839 --> 00:05:15.600 $5 ,000 for a complete written financial plan. 00:05:15.879 --> 00:05:18.379 So they're often called flat fee advisors. They 00:05:18.379 --> 00:05:21.040 are. And once you pay that fee, they have no 00:05:21.040 --> 00:05:23.639 reason to try and sell you anything else. The 00:05:23.639 --> 00:05:26.879 advice can be truly objective. Okay. Now we're 00:05:26.879 --> 00:05:29.579 getting into the murkier territory. Let's start 00:05:29.579 --> 00:05:31.899 with the classic brokerage model. Number three, 00:05:32.040 --> 00:05:34.839 commission on trades. This is where the advisor 00:05:34.839 --> 00:05:37.480 gets paid for every transaction. You know, maybe 00:05:37.480 --> 00:05:40.079 $12 every time they buy or sell a security for 00:05:40.079 --> 00:05:43.199 you. And the conflict there is just immediately 00:05:43.199 --> 00:05:45.399 obvious. It's immediate and it can be disastrous. 00:05:45.879 --> 00:05:48.680 This model actively incentivizes them to trade 00:05:48.680 --> 00:05:50.939 as much as possible, a practice that has a name, 00:05:51.079 --> 00:05:54.420 churning. Churning. It just sounds bad. Can you 00:05:54.420 --> 00:05:56.360 give us a quick concrete example of what that 00:05:56.360 --> 00:05:58.420 actually looks like for someone to count? Sure. 00:05:58.639 --> 00:06:02.490 Imagine you have... say, $200 ,000 in a brokerage 00:06:02.490 --> 00:06:05.689 account. If your broker decides to reposition 00:06:05.689 --> 00:06:08.529 your portfolio every few weeks, selling some 00:06:08.529 --> 00:06:11.089 things, buying others, those little transaction 00:06:11.089 --> 00:06:14.490 costs start adding up incredibly fast. Even if 00:06:14.490 --> 00:06:17.699 they seem small, like $12 a trade. Exactly. If 00:06:17.699 --> 00:06:20.000 they move your entire portfolio around three 00:06:20.000 --> 00:06:23.180 times in a year, the total commission cost plus 00:06:23.180 --> 00:06:26.100 all the other friction from trading can easily 00:06:26.100 --> 00:06:29.040 eat up 2 % or 3 % of your account's value every 00:06:29.040 --> 00:06:31.259 year. And that's a permanent loss, even if the 00:06:31.259 --> 00:06:33.680 investments themselves go nowhere. It's a permanent 00:06:33.680 --> 00:06:35.939 loss. The principal -agent problem is crystal 00:06:35.939 --> 00:06:38.519 clear. The advisor gets richer by making your 00:06:38.519 --> 00:06:41.180 account poorer through fees. That's a huge incentive 00:06:41.180 --> 00:06:44.079 for bad behavior. And the next model is maybe 00:06:44.079 --> 00:06:46.420 even more profitable for the advisor. Number 00:06:46.420 --> 00:06:49.420 four. The load or commission on products. Right. 00:06:49.540 --> 00:06:51.879 This is a commission based on how much you invest 00:06:51.879 --> 00:06:54.240 in a specific product, like a mutual fund or 00:06:54.240 --> 00:06:56.980 a variable annuity. These are often called loads. 00:06:57.160 --> 00:06:59.300 So if a broker sells you a mutual fund with a 00:06:59.300 --> 00:07:01.899 front end load. They might get paid, say, four 00:07:01.899 --> 00:07:03.540 or five percent of your investment right off 00:07:03.540 --> 00:07:05.519 the top. So if you invest ten thousand dollars, 00:07:05.699 --> 00:07:07.639 five hundred of it goes straight to the broker 00:07:07.639 --> 00:07:09.740 and never even gets invested for you. And the 00:07:09.740 --> 00:07:11.720 conflict is that there might be a better, cheaper 00:07:11.720 --> 00:07:14.920 fund out there. Of course. If the market has 00:07:14.920 --> 00:07:18.139 an identical low -cost fund that pays the broker 00:07:18.139 --> 00:07:21.040 zero and no load fund and another high -cost 00:07:21.040 --> 00:07:24.339 one that pays them 5%, the whole structure pushes 00:07:24.339 --> 00:07:26.800 them to recommend the one that's better for them, 00:07:26.800 --> 00:07:30.319 not for you. Okay, method number five. Mark up 00:07:30.319 --> 00:07:33.459 or mark down. This is common in firms that have 00:07:33.459 --> 00:07:36.079 their own inventory of products, like bonds. 00:07:36.360 --> 00:07:39.040 When you buy one of their house bonds, they sell 00:07:39.040 --> 00:07:42.060 it to you. at a markup over the real market price. 00:07:42.220 --> 00:07:44.160 And when you sell it back. They buy it from you 00:07:44.160 --> 00:07:46.139 at a markdown. It's a subtle way they make a 00:07:46.139 --> 00:07:47.939 profit on the transaction and steer you toward 00:07:47.939 --> 00:07:50.040 their own products instead of whatever is most 00:07:50.040 --> 00:07:52.160 competitive on the open market. And finally, 00:07:52.180 --> 00:07:54.459 the one that really defines the modern wealth 00:07:54.459 --> 00:07:58.720 management world. Number six, the assets under 00:07:58.720 --> 00:08:01.819 management or AUM fee. This is the dominant model 00:08:01.819 --> 00:08:05.620 for RIAs. It's a periodic fee, usually charged 00:08:05.620 --> 00:08:08.519 annually. That's just a percentage of the total 00:08:08.519 --> 00:08:10.720 assets they manage for you. And the standard 00:08:10.720 --> 00:08:13.759 figure is usually around 1%, right? 1 % is the 00:08:13.759 --> 00:08:15.560 number you hear all the time. So if you have 00:08:15.560 --> 00:08:18.379 a $5 million portfolio with them, they charge 00:08:18.379 --> 00:08:22.300 you $50 ,000 every year. Now, the conflict here 00:08:22.300 --> 00:08:25.379 is different. It's not about churning. No, the 00:08:25.379 --> 00:08:27.240 AUM model is good because it doesn't encourage 00:08:27.240 --> 00:08:30.079 a lot of trading. The conflict here is all about 00:08:30.079 --> 00:08:32.399 asset gathering. At the expense of good advice. 00:08:32.860 --> 00:08:36.600 Precisely. If an advisor makes $10 ,000 a year 00:08:36.600 --> 00:08:40.000 on your $1 million portfolio and you tell them 00:08:40.000 --> 00:08:42.059 you have $200 ,000 in cash you're thinking of 00:08:42.059 --> 00:08:43.980 using to pay off your mortgage. That's bad for 00:08:43.980 --> 00:08:46.220 them. It's terrible for them. If you pay off 00:08:46.220 --> 00:08:48.820 that debt, their AUM goes down and so does their 00:08:48.820 --> 00:08:51.830 income. They are financially incentivized to 00:08:51.830 --> 00:08:53.750 tell you to invest that cash with them instead, 00:08:53.970 --> 00:08:56.750 even if paying off high interest debt is clearly 00:08:56.750 --> 00:08:59.809 the smarter financial move for you. So it's unavoidable. 00:09:00.149 --> 00:09:03.909 This split between commissions and fees is the 00:09:03.909 --> 00:09:06.840 great dividing line in the entire industry. And 00:09:06.840 --> 00:09:09.360 it's so important it defines the two main regulatory 00:09:09.360 --> 00:09:11.899 categories in the U .S. Yeah, if you look at 00:09:11.899 --> 00:09:13.980 how financial advice is structured in the U .S., 00:09:13.980 --> 00:09:16.360 it all really rests on these two very distinct 00:09:16.360 --> 00:09:18.899 pillars. And they're defined by how they're paid 00:09:18.899 --> 00:09:20.960 and what standard of care they owe you. Okay, 00:09:21.039 --> 00:09:22.960 so what's pillar number one? Pillar number one 00:09:22.960 --> 00:09:26.480 is the broker -dealer, or BD. These are the firms 00:09:26.480 --> 00:09:29.220 and their agents who earn commissions from sales. 00:09:29.620 --> 00:09:32.019 Transaction model. Exactly. They're regulated 00:09:32.019 --> 00:09:35.820 by FINRA, the Financial Industry Regulatory Authority, 00:09:36.019 --> 00:09:38.440 and they operate under the suitability standard. 00:09:38.759 --> 00:09:40.700 We'll dig into what that means, but for now, 00:09:40.720 --> 00:09:42.379 just think of them as being in the business of 00:09:42.379 --> 00:09:45.159 facilitating a sale. And pillar number two. That's 00:09:45.159 --> 00:09:48.279 the registered investment advisor, or RIA. These 00:09:48.279 --> 00:09:50.899 firms and their reps usually charge a fee, most 00:09:50.899 --> 00:09:53.860 often that AUM fee. And here's the crucial part. 00:09:54.450 --> 00:09:57.029 RIAs are legally required to be fiduciaries. 00:09:57.029 --> 00:09:58.909 They have to put your interests first. They must. 00:09:59.389 --> 00:10:01.990 And their registration is handled either by the 00:10:01.990 --> 00:10:04.529 state or for the big ones at the federal level 00:10:04.529 --> 00:10:06.750 with the SEC. So the oversight is all broken 00:10:06.750 --> 00:10:09.309 up. It's completely fragmented. Femora handles 00:10:09.309 --> 00:10:12.289 the brokers. The SEC handles the investment advisors. 00:10:12.549 --> 00:10:14.649 And then you have state authorities that regulate 00:10:14.649 --> 00:10:17.669 insurance companies and their agents. So one 00:10:17.669 --> 00:10:19.730 person, if they have all those registrations, 00:10:19.730 --> 00:10:21.929 could be operating under three different rule 00:10:21.929 --> 00:10:23.350 books depending on what they're trying to sell 00:10:23.350 --> 00:10:26.289 you in that moment. Wow. And this whole two pillar 00:10:26.289 --> 00:10:29.110 system, it's not staying still. The sources show 00:10:29.110 --> 00:10:31.929 a huge shift happening, especially between 2007 00:10:31.929 --> 00:10:35.210 and 2018. The data is really stark. It tells 00:10:35.210 --> 00:10:37.730 a clear story about what consumers want and what 00:10:37.730 --> 00:10:40.590 regulation is pushing for. Over that decade, 00:10:40.769 --> 00:10:42.750 the number of independent broker dealer firms, 00:10:42.889 --> 00:10:46.659 the commission guys. It fell off a cliff. Really? 00:10:46.860 --> 00:10:49.460 Yeah, from over 1 ,000 firms down to just over 00:10:49.460 --> 00:10:52.519 800. The commission model was shrinking. And 00:10:52.519 --> 00:10:55.019 at the same time, the RIA side. The RIA industry 00:10:55.019 --> 00:10:58.080 just exploded. It grew substantially from around 00:10:58.080 --> 00:11:01.559 9 ,500 firms to over 15 ,000. It's a massive 00:11:01.559 --> 00:11:04.399 migration of advisors and money toward the fee 00:11:04.399 --> 00:11:07.019 -based fiduciary model. So advisors can work 00:11:07.019 --> 00:11:10.259 for a big wire house, a smaller independent broker 00:11:10.259 --> 00:11:14.340 -dealer, or be an independent RIA. But then there's 00:11:14.340 --> 00:11:16.980 this weird middle ground, right? The hybrid RIA. 00:11:17.159 --> 00:11:20.940 The hybrid RIA is a really complex beast. They 00:11:20.940 --> 00:11:23.139 are duly registered. They're registered as both 00:11:23.139 --> 00:11:26.519 a broker -dealer rep and as an RIA rep. Which 00:11:26.519 --> 00:11:28.740 means they can collect both fees and commissions. 00:11:29.100 --> 00:11:31.240 Exactly. When they act as an advisor, they charge 00:11:31.240 --> 00:11:33.879 a fee and are a fiduciary. When they act as a 00:11:33.879 --> 00:11:36.000 broker, they collect a commission and only have 00:11:36.000 --> 00:11:38.240 to meet the suitability standard. It's an ethical 00:11:38.240 --> 00:11:40.580 tightrope. How is a normal person supposed to 00:11:40.580 --> 00:11:42.990 know which hat they're wearing? That is the million 00:11:42.990 --> 00:11:45.309 dollar question. And most clients have no idea. 00:11:45.470 --> 00:11:47.789 Let's put some names on this. The sources say 00:11:47.789 --> 00:11:50.470 LPL Financial was the biggest independent broker 00:11:50.470 --> 00:11:52.750 dealer, one of the commission powerhouses. Right. 00:11:52.870 --> 00:11:54.830 Along with firms like Ameriprise and Raymond 00:11:54.830 --> 00:11:58.549 James. But even they felt the pressure. A firm 00:11:58.549 --> 00:12:00.889 like Edward Jones, which was huge in the broker 00:12:00.889 --> 00:12:03.929 world, completely stopped selling commission 00:12:03.929 --> 00:12:07.230 based funds back in 2017. It was a direct response 00:12:07.230 --> 00:12:09.590 to a new rule from the Department of Labor that 00:12:09.590 --> 00:12:11.950 was about to take effect. It just shows how a 00:12:11.950 --> 00:12:14.370 regulatory threat can force a company to change 00:12:14.370 --> 00:12:17.870 its entire business model almost overnight. And 00:12:17.870 --> 00:12:21.710 on the RIA side, the fee side, you have giants 00:12:21.710 --> 00:12:25.029 like Edelman Financial Engines managing hundreds 00:12:25.029 --> 00:12:27.250 of billions of dollars. And the infrastructure 00:12:27.250 --> 00:12:30.340 behind them is really concentrated. It is. Something 00:12:30.340 --> 00:12:33.700 like 80 % of all the money managed by RIAs, that's 00:12:33.700 --> 00:12:36.460 trillions of dollars, sits on one of just four 00:12:36.460 --> 00:12:39.019 big platforms, you know, places like Fidelity, 00:12:39.200 --> 00:12:42.039 Schwab and Pershing. They're the backbone that 00:12:42.039 --> 00:12:45.019 lets all these RIAs operate. So it's clear the 00:12:45.019 --> 00:12:47.379 fee -based model is winning. But the old commission 00:12:47.379 --> 00:12:50.240 model? It's not dead. The sources said Merrill 00:12:50.240 --> 00:12:52.759 Lynch had largely avoided the RIA model as of 00:12:52.759 --> 00:12:54.899 a few years ago. That's right. While others like 00:12:54.899 --> 00:12:56.960 Wells Fargo and Goldman Sachs were starting to 00:12:56.960 --> 00:12:59.799 embrace it. So you still have this clash of philosophies, 00:12:59.799 --> 00:13:02.179 even inside the most famous names on Wall Street. 00:13:02.340 --> 00:13:04.220 OK, we've defined the two pillars. Now we have 00:13:04.220 --> 00:13:06.440 to get to the absolute heart of the matter. The 00:13:06.440 --> 00:13:08.919 legal difference between being a fiduciary and 00:13:08.919 --> 00:13:11.720 just being suitable. The concept of the fiduciary 00:13:11.720 --> 00:13:14.379 standard, it's really the highest level of trust 00:13:14.379 --> 00:13:17.259 in financial advice. It's the highest legal standard 00:13:17.259 --> 00:13:20.820 of care. And for an RIA, it's not optional. It's 00:13:20.820 --> 00:13:24.480 mandated by law. Which law? The Anti -Fraud Provisions 00:13:24.480 --> 00:13:26.879 and the Investment Advisors Act of 1940. It's 00:13:26.879 --> 00:13:28.919 been on the books for a very long time. And what 00:13:28.919 --> 00:13:31.529 does it actually require them to do? In the simplest 00:13:31.529 --> 00:13:34.429 terms. It means the investment advisor must hold 00:13:34.429 --> 00:13:37.389 the client's interest above its own in all matters, 00:13:37.490 --> 00:13:40.110 full stop. So if there's a choice. If a choice 00:13:40.110 --> 00:13:42.830 exists between what makes the advisor more money 00:13:42.830 --> 00:13:45.269 and what's better for the client, the fiduciary 00:13:45.269 --> 00:13:48.169 has to choose the client's benefit. every single 00:13:48.169 --> 00:13:50.289 time. And the SEC has actually spelled this out, 00:13:50.389 --> 00:13:52.330 right? It's not just a general idea. No. The 00:13:52.330 --> 00:13:55.669 SEC has four very specific duties. One, always 00:13:55.669 --> 00:13:58.450 place the client's interest first. Two, make 00:13:58.450 --> 00:14:00.429 reasonable investment recommendations that are 00:14:00.429 --> 00:14:03.169 free from outside influences. So no kickbacks 00:14:03.169 --> 00:14:06.649 from fund companies. None. Three, they have to 00:14:06.649 --> 00:14:08.870 select brokers who provide the best execution 00:14:08.870 --> 00:14:11.309 for trades, meaning the most favorable terms 00:14:11.309 --> 00:14:13.970 for the client. And four, and this is critical, 00:14:14.110 --> 00:14:16.210 they have to make recommendations based on a 00:14:16.210 --> 00:14:18.700 reasonable inquiry into your specific situation, 00:14:19.059 --> 00:14:22.440 your goals, your finances, all of it. The SEC 00:14:22.440 --> 00:14:26.820 even has a rule, Rule 204 about their code of 00:14:26.820 --> 00:14:29.100 ethics. How does that work in the real world? 00:14:29.259 --> 00:14:31.799 That rule is so important because it tackles 00:14:31.799 --> 00:14:34.809 conflicts from personal trading. The firm's code 00:14:34.809 --> 00:14:37.429 of ethics has to have standards of conduct, and 00:14:37.429 --> 00:14:39.429 it has to address what happens when employees 00:14:39.429 --> 00:14:41.970 trade for their own accounts. To stop them from 00:14:41.970 --> 00:14:44.509 front -running their own clients. Exactly. To 00:14:44.509 --> 00:14:46.830 stop a situation where an advisor buys a stock 00:14:46.830 --> 00:14:49.110 for themselves, then recommends it to all their 00:14:49.110 --> 00:14:51.330 clients to drive the price up, and then sells 00:14:51.330 --> 00:14:53.830 their personal shares for a profit. The code 00:14:53.830 --> 00:14:56.190 requires surveillance to minimize that kind of 00:14:56.190 --> 00:14:58.909 self -dealing. Okay, that's the high bar. Now 00:14:58.909 --> 00:15:00.970 let's cross back over to the broker -dealer side, 00:15:01.210 --> 00:15:03.029 which operates under that much lower standard. 00:15:03.019 --> 00:15:06.019 standard suitability. And they can do that because 00:15:06.019 --> 00:15:08.840 of an exemption in that same 1940 act. That's 00:15:08.840 --> 00:15:13.379 right. Section 202A11C of the act basically says 00:15:13.379 --> 00:15:17.240 that if a broker dealer's advice is solely incidental 00:15:17.240 --> 00:15:19.080 to their main business of selling securities 00:15:19.080 --> 00:15:21.759 and they don't get any special pay for that advice, 00:15:21.980 --> 00:15:24.480 they're exempt from being a fiduciary. The law 00:15:24.480 --> 00:15:26.500 basically sees them as salespeople. It does. 00:15:26.700 --> 00:15:28.899 And salespeople aren't held to the same standard 00:15:28.899 --> 00:15:32.080 as expert consultants. So if the RIA has to recommend 00:15:32.080 --> 00:15:35.019 the best option for you. The broker dealer, regulated 00:15:35.019 --> 00:15:37.720 by FINRA, just has to recommend something that's 00:15:37.720 --> 00:15:40.019 suitable. Let's use an analogy here. Okay, the 00:15:40.019 --> 00:15:42.100 shoe store analogy works well. Let's say you 00:15:42.100 --> 00:15:45.120 walk into a shoe store. The broker dealer, under 00:15:45.120 --> 00:15:47.679 the suitability standard, just has to show you 00:15:47.679 --> 00:15:49.559 a pair of shoes that fits what you asked for. 00:15:50.059 --> 00:15:51.639 You need running shoes. They show you running 00:15:51.639 --> 00:15:53.399 shoes. That's suitable. And they have to do their 00:15:53.399 --> 00:15:54.980 homework first, right? The know your customer 00:15:54.980 --> 00:15:58.240 rule. Yes. FINRA rule 2111, the know your customer 00:15:58.240 --> 00:16:00.879 rule, requires them to reasonably find out your 00:16:00.879 --> 00:16:03.179 financial status, your goals, your risk tolerance. 00:16:03.539 --> 00:16:05.779 But those suitable running shoes they show me 00:16:05.779 --> 00:16:10.200 might be the store's own brand, cost $300, and 00:16:10.200 --> 00:16:13.419 pay the salesperson a huge commission. While 00:16:13.419 --> 00:16:16.080 there's a better, cheaper pair from another brand 00:16:16.080 --> 00:16:19.559 sitting in the back room. Exactly. Under suitability, 00:16:19.799 --> 00:16:22.440 the broker is not required to even tell you about 00:16:22.440 --> 00:16:24.840 the better, cheaper pair. They only have to show 00:16:24.840 --> 00:16:27.720 you something that is not unsuitable. They meet 00:16:27.720 --> 00:16:29.759 the letter of the law without meeting the spirit 00:16:29.759 --> 00:16:32.240 of putting your interests first. Now, to be fair, 00:16:32.320 --> 00:16:35.139 NRI has tried to raise this bar a bit. After 00:16:35.139 --> 00:16:39.360 2012, that Rule 2111 was expanded. That was a 00:16:39.360 --> 00:16:42.139 key change. Before, it was really just about 00:16:42.139 --> 00:16:45.419 individual trades. The new rule expanded their 00:16:45.419 --> 00:16:48.139 liability to include recommendations of strategy. 00:16:48.340 --> 00:16:51.120 So advice on taxes, retirement, things like that 00:16:51.120 --> 00:16:53.879 now falls under suitability. And they also have 00:16:53.879 --> 00:16:55.620 to advise you to hold something, right? Correct. 00:16:55.740 --> 00:16:58.259 A broker can't just recommend something and then 00:16:58.259 --> 00:17:00.580 ignore it if it starts performing terribly. They 00:17:00.580 --> 00:17:02.980 now have a duty to ensure the investment or the 00:17:02.980 --> 00:17:05.940 strategy remains suitable for you. It's a higher 00:17:05.940 --> 00:17:08.259 standard than it was, but it's still not a full 00:17:08.259 --> 00:17:10.559 fiduciary duty. And this all just gets even more 00:17:10.559 --> 00:17:12.319 confusing when we looked at that hybrid advisor 00:17:12.319 --> 00:17:15.319 again, the person who was both a broker and an 00:17:15.319 --> 00:17:19.000 RIA. It's an explosion of conflict. In theory, 00:17:19.019 --> 00:17:20.380 they have to tell you which hat they're wearing. 00:17:20.700 --> 00:17:23.420 Right now, I'm acting as your broker and selling 00:17:23.420 --> 00:17:25.859 you the suitable product for a commission. Then, 00:17:26.000 --> 00:17:28.759 OK, now I'm putting on my fiduciary hat and giving 00:17:28.759 --> 00:17:31.480 you advice for a fee. But how can a client ever 00:17:31.480 --> 00:17:34.839 really know that the advice isn't just a setup 00:17:34.839 --> 00:17:38.099 for the sale? They can't. That lack of clarity 00:17:38.099 --> 00:17:40.839 is why many people are so skeptical of the hybrid 00:17:40.839 --> 00:17:43.829 model. And on top of that, many of these hybrid 00:17:43.829 --> 00:17:46.029 advisors are stuck on what's called a captive 00:17:46.029 --> 00:17:48.490 platform. Meaning? Meaning their broker dealer 00:17:48.490 --> 00:17:50.869 affiliation limits the products they can recommend. 00:17:51.150 --> 00:17:54.069 So even if they're acting as a fiduciary, if 00:17:54.069 --> 00:17:56.069 they can only choose from a pre -approved list 00:17:56.069 --> 00:17:58.609 of funds from their parent company, their advice 00:17:58.609 --> 00:18:01.329 is inherently restricted. True independence is 00:18:01.329 --> 00:18:03.670 really only found with those independent RIAs 00:18:03.670 --> 00:18:06.259 who aren't tied to a broker dealer. This whole 00:18:06.259 --> 00:18:09.140 regulatory mess where you have two totally different 00:18:09.140 --> 00:18:12.220 ethical standards is what led to the huge political 00:18:12.220 --> 00:18:14.779 battles we saw over the last decade. The pressure 00:18:14.779 --> 00:18:17.640 to get rid of this two track system really ramped 00:18:17.640 --> 00:18:20.500 up after the 2008 financial crisis. Yeah. I mean, 00:18:20.519 --> 00:18:22.039 there was a feeling that if brokers had been 00:18:22.039 --> 00:18:24.160 held to a higher standard, some of the worst 00:18:24.160 --> 00:18:26.000 parts of the crash might have been avoided. And 00:18:26.000 --> 00:18:27.960 Congress responded with the Dodd -Frank Act in 00:18:27.960 --> 00:18:30.680 2010. It was a massive piece of legislation, 00:18:31.000 --> 00:18:34.200 but a key part of it gave the SEC the authority 00:18:34.200 --> 00:18:37.880 to study. this issue and if they saw fit to extend 00:18:37.880 --> 00:18:40.420 that high fiduciary duty to cover brokers. So 00:18:40.420 --> 00:18:42.880 the SEC looked into it. They did. And their own 00:18:42.880 --> 00:18:45.660 study in 2011 came back with a clear recommendation. 00:18:46.160 --> 00:18:48.839 Move forward with a new rule to create a uniform 00:18:48.839 --> 00:18:51.480 fiduciary standard for both brokers and investment 00:18:51.480 --> 00:18:53.500 advisors when they're giving personalized advice. 00:18:53.759 --> 00:18:56.299 The path seemed clear. It did. But rulemaking 00:18:56.299 --> 00:19:00.339 at this level is incredibly slow and politically 00:19:00.339 --> 00:19:03.099 charged. And the financial industry has a very 00:19:03.099 --> 00:19:06.619 powerful lobby. the SEC just sat on it for years. 00:19:06.859 --> 00:19:09.619 And because the SEC didn't act, another government 00:19:09.619 --> 00:19:12.079 agency decided to jump in, the Department of 00:19:12.079 --> 00:19:14.200 Labor, the DOL. This is where the story gets 00:19:14.200 --> 00:19:18.059 really dramatic. The JAL used its authority over 00:19:18.059 --> 00:19:21.200 retirement plans under a law called ERISA to 00:19:21.200 --> 00:19:25.339 make a move. In April 2016, they finalized their 00:19:25.339 --> 00:19:29.039 own landmark rule. What was the rule? The genius 00:19:29.039 --> 00:19:32.059 of it was its focus. The rule said that any financial 00:19:32.059 --> 00:19:34.079 professional working with retirement accounts, 00:19:34.160 --> 00:19:37.640 so IRAs, 401ks, all of that, had to act as a 00:19:37.640 --> 00:19:40.940 full fiduciary. Wow. That's a direct hit on the 00:19:40.940 --> 00:19:43.160 brokerage industry's business model. All that 00:19:43.160 --> 00:19:45.190 retirement money. which is the most important 00:19:45.190 --> 00:19:47.549 savings for most people. Suddenly, for all that 00:19:47.549 --> 00:19:49.670 money, a broker couldn't just sell a suitable 00:19:49.670 --> 00:19:52.349 product anymore. They had to recommend the best 00:19:52.349 --> 00:19:54.609 one, the one with the lowest cost, the one that 00:19:54.609 --> 00:19:56.869 was truly in the client's best interest. This 00:19:56.869 --> 00:19:59.250 was a direct attack on high commission products 00:19:59.250 --> 00:20:01.210 that were eating away at people's retirement 00:20:01.210 --> 00:20:03.950 savings. A direct strike. Now, to allow the commission 00:20:03.950 --> 00:20:06.589 model to even survive, the rule included something 00:20:06.589 --> 00:20:08.789 called the Best Interest Contract Exemption, 00:20:08.849 --> 00:20:12.109 or BICE. A broker could still get a commission, 00:20:12.329 --> 00:20:14.569 but only if they signed a legal contract with 00:20:14.569 --> 00:20:16.950 the client promising to act in their best interest 00:20:16.950 --> 00:20:19.430 and be transparent about costs. So how did the 00:20:19.430 --> 00:20:21.980 industry react? The outcry was immediate and 00:20:21.980 --> 00:20:24.579 deafening. Critics argued that it would be too 00:20:24.579 --> 00:20:26.500 expensive to comply, and they claimed it would 00:20:26.500 --> 00:20:29.839 actually hurt small investors. Oh, so? They argued 00:20:29.839 --> 00:20:32.480 that the cost of compliance would make it unprofitable 00:20:32.480 --> 00:20:34.660 to give advice to people with smaller retirement 00:20:34.660 --> 00:20:38.000 accounts. That argument, that fiduciary standards 00:20:38.000 --> 00:20:41.079 hurt small investors, is often industry code 00:20:41.079 --> 00:20:43.700 for, we can't make enough money off them under 00:20:43.700 --> 00:20:46.500 this stricter standard. And the data showed advisors 00:20:46.500 --> 00:20:50.289 were worried. A survey found 73 % of advisors 00:20:50.289 --> 00:20:52.450 thought the rule would hurt their business, and 00:20:52.450 --> 00:20:55.390 66 % said they would immediately have to re -evaluate 00:20:55.390 --> 00:20:57.549 the products they were recommending. Which basically 00:20:57.549 --> 00:21:00.210 proves their product shelf was based on their 00:21:00.210 --> 00:21:02.289 own pay, not just what was best for clients. 00:21:02.589 --> 00:21:05.250 It's a pretty clear admission. But despite the 00:21:05.250 --> 00:21:08.130 rules starting to take effect in 2017, the legal 00:21:08.130 --> 00:21:09.950 challenges from the industry were relentless. 00:21:10.170 --> 00:21:12.930 And they worked. The rule didn't last long. It 00:21:12.930 --> 00:21:15.819 was brutally short -lived. A federal court, the 00:21:15.819 --> 00:21:18.539 Fifth Circuit Court of Appeals, officially vacated 00:21:18.539 --> 00:21:21.940 the rule on June 21, 2018. They said the DOL 00:21:21.940 --> 00:21:24.660 had overstepped its authority. And just like 00:21:24.660 --> 00:21:26.900 that, the biggest attempt to unify the advice 00:21:26.900 --> 00:21:29.859 standard was dead. So with the DOL rule gone... 00:21:30.170 --> 00:21:32.390 The SEC, the agency that was supposed to fix 00:21:32.390 --> 00:21:35.170 this back in 2010, they finally did something. 00:21:35.269 --> 00:21:37.769 They adopted Regulation Best Interest or RegBI. 00:21:38.049 --> 00:21:41.690 They did. RegBI came out in June 2019, and it 00:21:41.690 --> 00:21:44.609 created a new standard for broker -dealers. It 00:21:44.609 --> 00:21:46.970 requires them to act in the best interest of 00:21:46.970 --> 00:21:48.549 their customer when they make a recommendation. 00:21:48.630 --> 00:21:51.569 Which sounds good. Better than suitable. It is 00:21:51.569 --> 00:21:53.869 an improvement over the old suitability standard, 00:21:54.009 --> 00:21:57.220 but... and this is the most important part, RegBI 00:21:57.220 --> 00:21:59.680 does not create the same high fiduciary standard 00:21:59.680 --> 00:22:02.099 that RIAs have to follow. It's a middle ground. 00:22:02.240 --> 00:22:04.559 It raised the floor for brokers, but it didn't 00:22:04.559 --> 00:22:06.559 unify the standard at the top. So we're still 00:22:06.559 --> 00:22:08.420 left with two different standards. We are. And 00:22:08.420 --> 00:22:11.099 the fight isn't over. The sources note the DOL 00:22:11.099 --> 00:22:14.539 proposed a new fiduciary rule in 2020. This issue 00:22:14.539 --> 00:22:18.380 is still very much alive. So since the Registered 00:22:18.380 --> 00:22:21.359 Investment Advisor or RIA model is the one with 00:22:21.359 --> 00:22:23.859 that highest fiduciary standard. Let's just dig 00:22:23.859 --> 00:22:26.339 a little deeper into how they're set up. We know 00:22:26.339 --> 00:22:28.960 an RIA gives advice for compensation, but what 00:22:28.960 --> 00:22:31.000 decides if they register with their state or 00:22:31.000 --> 00:22:33.579 with the SEC at the federal level? It's all about 00:22:33.579 --> 00:22:37.240 size, specifically their assets under management, 00:22:37.319 --> 00:22:40.960 or AUM. Ah, okay. If a firm manages less than 00:22:40.960 --> 00:22:43.920 $100 million in assets, they have to register 00:22:43.920 --> 00:22:45.799 with the state securities agency where they do 00:22:45.799 --> 00:22:48.029 business. And if they're bigger. 100 million 00:22:48.029 --> 00:22:50.809 or more in AUM, and they have to register directly 00:22:50.809 --> 00:22:54.529 with the SEC. The idea is to have the SEC focus 00:22:54.529 --> 00:22:57.410 its resources on the biggest firms with the most 00:22:57.410 --> 00:23:00.069 potential market impact. And the people inside 00:23:00.069 --> 00:23:03.019 these firms. The ones giving the advice are the 00:23:03.019 --> 00:23:06.279 investment advisor representatives or IRRs. What 00:23:06.279 --> 00:23:08.519 do they have to do to qualify? IRRs typically 00:23:08.519 --> 00:23:11.059 have to pass a pretty tough exam, the Series 00:23:11.059 --> 00:23:14.180 65 exam. It's very focused on fiduciary rules, 00:23:14.440 --> 00:23:17.359 ethics, and economic theory. But you can get 00:23:17.359 --> 00:23:19.599 that requirement waived if you already hold certain 00:23:19.599 --> 00:23:22.119 professional designations. Like what? Things 00:23:22.119 --> 00:23:24.720 like Certified Financial Planner, CFP designation, 00:23:25.059 --> 00:23:28.059 or the Chartered Financial Analyst, CFA. These 00:23:28.059 --> 00:23:29.839 are often seen as even more rigorous than the 00:23:29.839 --> 00:23:32.039 exam itself. So they count as a pre -qualifier. 00:23:32.119 --> 00:23:34.819 And this can vary state by state. It can. New 00:23:34.819 --> 00:23:37.339 York, for example, has historically not had an 00:23:37.339 --> 00:23:40.940 exam requirement for reps of SEC registered firms, 00:23:41.140 --> 00:23:43.420 relying instead on the firm's own compliance. 00:23:43.980 --> 00:23:46.130 OK, let's get back to the money. The management 00:23:46.130 --> 00:23:49.150 fee. This AUM model isn't just for individual 00:23:49.150 --> 00:23:51.750 RIAs, right? It's how the whole institutional 00:23:51.750 --> 00:23:54.269 investment world works. That's right. For an 00:23:54.269 --> 00:23:57.109 individual RIA, the fee is usually that 1 % of 00:23:57.109 --> 00:24:01.549 AUM. The sources say about 95 % of RIAs use this 00:24:01.549 --> 00:24:04.690 model, but the concept is much bigger. One thing 00:24:04.690 --> 00:24:07.130 about RIAs, they can't really advertise their 00:24:07.130 --> 00:24:09.390 performance like a mutual fund can because every 00:24:09.390 --> 00:24:11.990 client's portfolio is different. Correct. But 00:24:11.990 --> 00:24:14.250 if they do use performance data in their marketing, 00:24:14.430 --> 00:24:17.819 the SEC requires it to be factual and not misleading. 00:24:18.119 --> 00:24:21.279 So how does this AUM fee concept work for different 00:24:21.279 --> 00:24:23.619 kinds of funds like mutual funds? With mutual 00:24:23.619 --> 00:24:26.039 funds, the fees are very heavily regulated. They 00:24:26.039 --> 00:24:27.579 have to be spelled out clearly and they have 00:24:27.579 --> 00:24:29.779 to be approved by the fund's board of directors 00:24:29.779 --> 00:24:32.119 and by the shareholders. That's a protection 00:24:32.119 --> 00:24:34.099 for retail investors. And what about something 00:24:34.099 --> 00:24:36.880 more complex like private equity funds? PE funds 00:24:36.880 --> 00:24:39.460 have a much different fee structure. The investors, 00:24:39.559 --> 00:24:43.079 or limited partners, pay the manager. And the 00:24:43.079 --> 00:24:45.200 fee isn't based on the day -to -day value of 00:24:45.200 --> 00:24:48.099 the assets. What's it based on? In the first 00:24:48.099 --> 00:24:50.500 few years of the fund, the fee is based on the 00:24:50.500 --> 00:24:52.519 total amount of money investors committed to 00:24:52.519 --> 00:24:54.460 the fund, whether it's been invested yet or not. 00:24:54.599 --> 00:24:57.480 Usually it's 1 % to 2 % a year. Wait, so if I 00:24:57.480 --> 00:25:00.160 commit $100 million, they start charging me 2 00:25:00.160 --> 00:25:02.880 % on the full $100 million, even if they've only 00:25:02.880 --> 00:25:05.480 invested $10 million so far? That's right. It's 00:25:05.480 --> 00:25:08.259 a powerful incentive to take their time. Later 00:25:08.259 --> 00:25:11.299 in the fund's life, the fee basis changes. It 00:25:11.299 --> 00:25:13.460 drops to being based only on the capital that's 00:25:13.460 --> 00:25:15.400 actually been invested. And on top of that fee, 00:25:15.660 --> 00:25:18.500 PE managers get carried interest, which is their 00:25:18.500 --> 00:25:21.220 big performance bonus, usually 20 % of the profits. 00:25:21.500 --> 00:25:23.940 And finally, what about hedge funds? Hedge funds 00:25:23.940 --> 00:25:26.640 are famous for the 2 in 20 model. The management 00:25:26.640 --> 00:25:29.359 fee, the 2, is a percentage of the fund's net 00:25:29.359 --> 00:25:32.799 asset value. It can range from 1 % to 4%, but 00:25:32.799 --> 00:25:35.279 2 % has been the standard. So on a billion -dollar 00:25:35.279 --> 00:25:37.990 fund... That's a $20 million management fee. 00:25:38.250 --> 00:25:41.589 $20 million every year. And they get that fee 00:25:41.589 --> 00:25:44.890 even if the fund loses money. It just shows that 00:25:44.890 --> 00:25:46.609 whether you're talking about your personal advisor 00:25:46.609 --> 00:25:49.930 or a giant hedge fund, the compensation structure 00:25:49.930 --> 00:25:53.730 is the force that drives everything. We spent 00:25:53.730 --> 00:25:56.089 a lot of time on the U .S. system, which is clearly 00:25:56.089 --> 00:25:58.789 full of these conflicts. But the problem itself 00:25:58.789 --> 00:26:01.970 isn't unique. Let's zoom out and see how some 00:26:01.970 --> 00:26:04.480 other major countries handle this. It might give 00:26:04.480 --> 00:26:07.519 us a clue about where the U .S. could go. Let's 00:26:07.519 --> 00:26:09.539 start with the United Kingdom. In the U .K., 00:26:09.539 --> 00:26:11.539 advisors have to pass exams and be authorized 00:26:11.539 --> 00:26:14.539 by the Financial Conduct Authority, or FCA. And 00:26:14.539 --> 00:26:17.000 the FCA has to be satisfied that they are a fit 00:26:17.000 --> 00:26:19.250 and proper person. But the really interesting 00:26:19.250 --> 00:26:22.049 part is how they classify advisors. Yes. The 00:26:22.049 --> 00:26:24.890 UK has a mandatory distinction. Advisors are 00:26:24.890 --> 00:26:26.730 either restricted or independent. What's the 00:26:26.730 --> 00:26:28.789 difference? An independent advisor is legally 00:26:28.789 --> 00:26:31.109 required to select solutions for you from all 00:26:31.109 --> 00:26:33.130 the products and providers available in the entire 00:26:33.130 --> 00:26:35.930 market. A restricted advisor, on the other hand, 00:26:35.930 --> 00:26:38.990 can only advise on a specific area, like pensions, 00:26:38.990 --> 00:26:41.650 or can only use products from their one affiliated 00:26:41.650 --> 00:26:44.500 company, like a bank. So they basically put a 00:26:44.500 --> 00:26:47.859 label on the captive platform advisor. That's 00:26:47.859 --> 00:26:51.059 a much clearer system for the consumer than the 00:26:51.059 --> 00:26:53.420 U .S. hybrid model. It's completely transparent. 00:26:53.640 --> 00:26:55.680 It removes the ambiguity. Interestingly, the 00:26:55.680 --> 00:26:57.900 UK also used to have a best advice standard, 00:26:58.079 --> 00:27:00.900 but they've since moved to a standard of appropriate, 00:27:01.099 --> 00:27:03.539 which is a little closer to the U .S. suitability 00:27:03.539 --> 00:27:05.400 standard. What about somewhere like Ireland? 00:27:05.660 --> 00:27:10.279 In Ireland, the benchmark is the QFA. or qualified 00:27:10.279 --> 00:27:12.680 financial advisor. You have to get a diploma 00:27:12.680 --> 00:27:15.339 and do continuous professional development. It's 00:27:15.339 --> 00:27:18.079 all about ensuring a baseline competency. Now, 00:27:18.160 --> 00:27:20.480 Australia is a really fascinating contrast to 00:27:20.480 --> 00:27:23.019 the US. It is. In Australia, advisors have to 00:27:23.019 --> 00:27:25.480 be qualified and licensed, similar to other places. 00:27:25.700 --> 00:27:28.380 But here's the massive difference. In Australia, 00:27:28.519 --> 00:27:31.140 financial advisors are subject to fiduciary obligations. 00:27:31.180 --> 00:27:34.000 So everyone is a fiduciary. Everyone giving that 00:27:34.000 --> 00:27:36.539 kind of advice is. It's the universal standard 00:27:36.539 --> 00:27:38.640 that consumer advocates in the US have been fighting 00:27:38.640 --> 00:27:41.460 for for years. They just did it. They mandated 00:27:41.460 --> 00:27:43.660 the highest standard of care for everyone, whether 00:27:43.660 --> 00:27:46.140 they're paid by fee or commission. That's a powerful 00:27:46.140 --> 00:27:48.859 comparison. While the US has been locked in this 00:27:48.859 --> 00:27:51.240 political fight for a decade, Australia just 00:27:51.240 --> 00:27:53.940 made it the law. Exactly. And in New Zealand, 00:27:54.059 --> 00:27:57.200 the focus is also on mandatory competence, with 00:27:57.200 --> 00:27:59.279 a national certificate required to give advice. 00:27:59.559 --> 00:28:01.299 So back in North America, what's the situation 00:28:01.299 --> 00:28:05.480 in Canada? Canada system is very decentralized. 00:28:06.079 --> 00:28:09.220 You need licenses to sell specific things like 00:28:09.220 --> 00:28:12.539 insurance or mutual funds. But the big gap is 00:28:12.539 --> 00:28:14.640 that there's very little regulation over who 00:28:14.640 --> 00:28:16.339 can just call themselves a financial planner, 00:28:16.420 --> 00:28:18.819 except in Quebec. So it's like the Wild West 00:28:18.819 --> 00:28:21.259 for the title itself. Pretty much. Which makes 00:28:21.259 --> 00:28:23.640 voluntary designations like the CFP all the more 00:28:23.640 --> 00:28:26.000 important for consumers to look for. And then 00:28:26.000 --> 00:28:28.900 in Asia, you see more centralized control. In 00:28:28.900 --> 00:28:31.539 India, the regulator, SEBI, requires you to be 00:28:31.539 --> 00:28:33.940 a... Register Investment Advisor, or RIA, a very 00:28:33.940 --> 00:28:36.500 specific designation. So if you put it all together, 00:28:36.619 --> 00:28:39.420 this global snapshot really shows that the U 00:28:39.420 --> 00:28:41.740 .S. system of maintaining two separate conflicting 00:28:41.740 --> 00:28:45.079 ethical standards is a bit of a regulatory outlier, 00:28:45.200 --> 00:28:47.140 especially compared to a country like Australia 00:28:47.140 --> 00:28:49.400 that just chose to mandate the highest standard 00:28:49.400 --> 00:28:52.099 across the board. And that brings us to the end 00:28:52.099 --> 00:28:54.240 of this deep dive. I think we accomplished our 00:28:54.240 --> 00:28:56.519 mission. We defined all the players. We followed 00:28:56.519 --> 00:28:58.940 the money. And we really clarified that huge 00:28:58.940 --> 00:29:01.230 split between the two pillars of finance. advice. 00:29:01.490 --> 00:29:04.670 We did. We established that the fee -based, client 00:29:04.670 --> 00:29:07.990 -first fiduciary standard is the high bar. It 00:29:07.990 --> 00:29:10.410 requires the advisor to always, in all circumstances, 00:29:10.670 --> 00:29:13.470 put your interests above their own. And we contracted 00:29:13.470 --> 00:29:16.789 that with the commission -based suitability standard 00:29:16.789 --> 00:29:19.650 for broker -dealers. That only requires an investment 00:29:19.650 --> 00:29:22.430 to be appropriate, not necessarily the best or 00:29:22.430 --> 00:29:24.269 the cheapest or the most effective choice for 00:29:24.269 --> 00:29:26.509 you. We also walked through that high -stakes 00:29:26.509 --> 00:29:28.759 political drama. from the hope of the Dodd -Frank 00:29:28.759 --> 00:29:31.700 Act to the intense industry lobbying that killed 00:29:31.700 --> 00:29:34.700 the DOL fiduciary rule, leaving us with the compromise 00:29:34.700 --> 00:29:37.660 of Reg BI. So the takeaway for you, the learner, 00:29:37.799 --> 00:29:39.819 is really practical. The first question you have 00:29:39.819 --> 00:29:42.400 to ask any financial professional is, are you 00:29:42.400 --> 00:29:44.519 a fiduciary for all the advice you provide me? 00:29:44.619 --> 00:29:47.609 And how do you get paid? That's the key. It's 00:29:47.609 --> 00:29:50.990 the key. Understanding their pay, whether it's 00:29:50.990 --> 00:29:53.569 AUM fees, commissions, product loads, that's 00:29:53.569 --> 00:29:56.569 the filter you have to use. If the legal standard 00:29:56.569 --> 00:29:58.930 they follow or the product they sell makes them 00:29:58.930 --> 00:30:01.309 more money, you have to be incredibly careful. 00:30:01.609 --> 00:30:03.789 So I'll leave you with this final provocative 00:30:03.789 --> 00:30:07.130 thought to consider. The fact that the DOL fiduciary 00:30:07.130 --> 00:30:10.269 rule was struck down shows just how fragile even 00:30:10.269 --> 00:30:13.549 the biggest consumer protections can be when 00:30:13.549 --> 00:30:17.500 faced with intense. industry opposition. So given 00:30:17.500 --> 00:30:19.819 that the independent RIA world continues to grow, 00:30:19.900 --> 00:30:21.940 but that lower suitability standard still exists 00:30:21.940 --> 00:30:24.400 for all non -retirement accounts, how much longer 00:30:24.400 --> 00:30:27.059 can the U .S. really sustain two completely different 00:30:27.059 --> 00:30:29.579 ethical and legal standards for professionals 00:30:29.579 --> 00:30:32.680 giving personalized financial advice to the very 00:30:32.680 --> 00:30:35.440 same person? Right. It's a tension. It's a fundamental 00:30:35.440 --> 00:30:37.539 tension that defines the entire landscape of 00:30:37.539 --> 00:30:39.660 personal finance. And it's one that could be 00:30:39.660 --> 00:30:42.259 resolved or maybe just reignited at any moment. 00:30:42.599 --> 00:30:45.000 Something critical to think about as you navigate 00:30:45.000 --> 00:30:47.480 your own financial journey. Thanks for diving 00:30:47.480 --> 00:30:49.180 deep with us. We'll see you next time.