Business

Financial Advisors in NJ to Join the Fiduciary Club (where us lawyers, trustees, and corporate directors hang out)

The New Jersey Attorney General and New Jersey Bureau of Securities (“Bureau”) recently proposed a new rule, N.J.A.C. 13:47A-6.4, requiring all investment professionals to act in accordance with the fiduciary duties of care and loyalty to their customers when “providing investment advice or recommending to a customer an investment strategy, the opening of or transfer of assets to any type of account, or the purchase, sale, or exchange of any security.”  Any conduct falling short of this fiduciary duty would, under the proposed rule, constitute a “dishonest and unethical practice.”

While transaction-based fees are not outlawed entirely, the proposed rule will limit their use except when “the fee is reasonable and is the best of the reasonably available fee options for the customer, and the duty of care is satisfied.”  Moreover incentives, such as sales contests, are presumptively invalid.

 Many consumers of investment products believe that their financial professional has a fiduciary duty to them, however, this is not the case.  The present SEC rule only requires financial advisors recommend suitable investments.  If the rule takes effect, New Jersey will be one of the first states to impose fiduciary duties on investment professionals.  Moreover, the proposed New Jersey rule will be stronger than the SEC’s proposed Regulation Best Interest, which would require brokers to act in the “best interests” of clients – presumably below the level of fiduciary duty.

New Jersey’s proposed fiduciary rule will likely go into effect in late 2019 or early 2020 (assuming it is not held up in court) and is being promoted as a win for consumers.  However, financial services professionals, advisors, brokers, and anyone licensed by the Bureau, will need to closely examine the products and services offered once the rule takes effect, how the rule will affect the their daily tasks (particularly for those in non-sales roles given that rule applies to all licensees), how to continue to receive transaction-based fees versus transitioning to a monthly fee or percentage based model, and for employed professionals how the fiduciary duty conflicts with the sales and other business goals of the employer.  Given the potential for this major shakeup, financial professionals should waste no time in preparing for the imposition of the rule.

-Nikitas Moustakas, Douglas M. Nelson

Wed Apr 17, 9:50am