Financial Advisers and Investors Face a Crazy Quilt of State Regulations

A hodgepodge of new state and federal rules for financial-services professionals promises to leave investors confused as to the nature of the advice they are getting.This muddle can be said to have started in 2019, when the Securities and Exchange Commission put the final touches on an investor-protection measure it dubbed Regulation Best Interest, or “Reg BI,” designed to set a minimum standard for financial advice. At the time, consumer advocates were pushing for what they argued was a higher standard: a fiduciary rule that legally required brokers to be held to the same standard as financial advisers, and that required all decisions be made to the benefit of investors, without loyalty to any financial firm. But the SEC in the end opted for the less-strict Reg BI, which simply says investments proposed by brokers and other financial professionals should align with investor goals, have clear disclosures and be free of conflicts of interest.

Several states seem to agree that a higher standard for broker conduct is still necessary, and have passed or are expected to pass legislation that holds more financial professionals to a fiduciary standard. The state regulations, however, differ slightly from one another, which could add to the confusion for both investors and financial professionals.

“I don’t think anyone, even the consumer advocates, thinks 50 states making their own rules is a good idea,” says

Brian Graff,

CEO of the American Retirement Association, an industry group for retirement professionals. “I’d like to think that more people would recognize that a lack of uniformity is going to create chaos and inefficiency,”

Michael Kreps,

a principal at Groom Law Group, a law firm that tracks regulations related to retirement investment products such IRAs, annuities and pensions, says it is likely that the patchwork will continue to grow.

“Ideally, we would have some kind of federal standard of care for people who sell financial products and a standard of care for people who provide advice with some kind of bright-line test, but that’s probably not going to happen,” Mr. Kreps says. “What we have now is the result of congressional inaction to form that kind of system.”

Fiduciary rules So far, four states—Massachusetts, Nevada, New Jersey and New York—either have passed or are about to enact their own fiduciary rules. These measures would hold brokers and advisers to the same fiduciary standard.

But each state has a slightly different interpretation of how a fiduciary standard will work. In Massachusetts, Nevada and New York, the states want advisers and brokers to be placed on the same level, with each adhering to a fiduciary standard. However, New Jersey goes further, applying the standard to brokers, agents, investment advisers and investment adviser representatives. In practice, this means that brokers who operate in multiple states will have to comply not just with Reg BI but also with more stringent rules, depending on where the clients live. Advisers, too, will have to ensure that they are complying with both SEC regulations and state-level regulations on fiduciary duty.

Mr. Graff suggests that could raise the cost of financial advice. If enhanced disclosures or additional reporting comes with an added cost, he reasons, that cost is likely to get passed on to the consumer.

Annuities Additional rule proposals could make things more complicated for sales and purchases of annuities, too. The National Association of Insurance Commissioners, or NAIC, the body that oversees regulation of annuities, has announced its own effort to establish a suitability rule for selling and advising on annuities. According to the rules being proposed by NAIC, recommendations of annuities would have to ensure that the product is in line with the goals of the investor; free of conflicts of interest for the adviser or insurance agent; and provides transparency around the total cost of the product.

Annuities don’t fall under the scope of Reg BI. Instead, they are insurance products, which means they will be subject to state rules regarding insurance. Nevertheless, annuities can be sold by financial advisers in addition to insurance agents. It isn’t yet clear whether financial advisers’ annuity sales will be subject to Reg BI on top of the state insurance rules. Sometimes annuities also are sold within employee retirement plans like 401(k)s. The NAIC has included a carve-out for brokers and advisers that already comply with Reg BI, but it is unlikely that individual investors will be aware of who complies with what without additional research.

Alabama, Arkansas, Arizona, Delware, Iowa, Michigan and Rhode Island have all adopted the NAIC suitability rules, which will go into effect this year.

Buyer beware The Biden administration might make the regulatory puzzle more complicated. President Biden has signaled his interest in more-robust oversight of the financial industry, and is likely to revisit both the fiduciary standard and Reg BI. But any new rules will have to reconcile what brokers have already done in response to Reg BI, as well as regulatory trends at the state level.

Mr. Kreps says that fiduciary regulation could end up evolving in a way similar to the Affordable Care Act. “Federal inaction led Massachusetts to do Romneycare and then other states did their own versions,” he says. “That eventually led to the ACA, which borrowed from what the states did. I think what we’re going to see here is the same story.”

If Mr. Kreps’s prediction turns out to be true, it could take years for a unified standard at the federal level. Investors will have to do research on their own in the interim to understand which rules apply in their states and to whom.

Ms. McCann is a writer in New York. She can be reached at

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