The SEC has just approved a radical change in the way brokers give financial advice

REUTERS / Jonathan Ernst

• The SEC has just voted to bring a radical change to the financial brokerage industry.
• The new standard required brokers to act in the "best interests" of clients.
• Visit MarketsInsider.com for more stories.

The Securities and Exchange Commission on Wednesday decided to finalize the rules relating to the obligations of investment advisers and brokers when managing clients' money. The two types of finance professionals differ in terms of their compensation structure and their responsibilities to investors. The new regulation will come into force in 60 days.

Typically, financial advisors earn portfolio fees based on badets under management, while brokers charge commissions on transactions. Advisors generally have fiduciary duties, requiring them to act in the best interests of clients, while brokers are only required to offer "suitable" investment products. The SEC has debated a change in these standards for decades, according to its statement on this topic.

"This set of rules will align legal requirements and disclosure requirements for brokers and investment advisors with reasonable expectations of investors, while preserving the access of retail investors to a range of products and services at a reasonable price. reasonable cost, "said SEC chairman Jay Clayton.

The new regulation has put in place a stricter standard, called "Best Interest Regulation" for brokers. As a result, brokers will have to act in the best interests of retail clients by recommending stocks, bonds or other securities.

These changes represent a significant step forward from the current "fitness" standard. According to the SEC, the new regulation "will make it clear that a securities dealer can not put its financial interests above the interests of a retail client when making recommendations."

However, brokers will continue to be able to charge commissions that the SEC had previously contemplated deleting.

They will also be required to disclose any conflict of interest, including information about any fees charged for the recommended products. Importantly, disclosure of any exception to the rule will not always work. Previously, the company sought to use "small print" to avoid the legal consequences of conflicts, such as the use of exclusive products generating additional costs.

The three SEC Republican Commissioners voted for the changes, with only Democrat Robert Jackson dissenting. Jackson blamed the reform for not going far enough to protect the interests of investors.

"Rather than asking Wall Street to give priority to investors, the current rules maintain a confusing standard that exposes millions of Americans to the costs of contradictory advice," Jackson wrote in a statement.

Cerulli Associates estimates that there are more than 300,000 brokers in the United States. Brokers represent an important source of advice for the $ 28 trillion of pension badets held by US investors. More than $ 9 trillion is held in IRAs alone, according to Pensions & Investments.