Regulation BI and Frogs….

bull frog, green, pond

It’s a little long…I am working on making these shorter!

Regulation BI and Frog Season…..           

For those of you who have been watching other things in the news these days aside from COVID 19 discussions a new regulation from the Securities Exchange Commission came into effect Jun 30, 2020.  Reg BI is primarily a result of the Department of Labor Fiduciary Standard, which was initially to be enacted under the Obama administration. As written, the DOL rule was quite vague and brought with it multiple levels of review and challenges in the court.  Like many things in DC, this can too was kicked down the road to the next administration, and Trump killed it in 2018.  The DOL was trying to ensure that fiduciaries in my business always act in the clients’ best interests and not for themselves.  Let me apologize in advance that such a rule has to exist. Sadly we have all heard of individuals in my industry taking advantage of clients intentionally and even unintentionally.  The SEC decided that a rule was still needed, and this rule would be part of our self-governing body instead of from a federal department.  So here we are, with Reg BI now in effect.

I am reasonably sure that no one here wants to read an entire piece on this new regulation’s intricacies, and if you do want to read, Google has about 734,000,000 results found in .36 seconds for you to choose from.  Instead, I will attempt to explain the 2 main differences in how advisors and planners work and how this rule impacts us, and I will do this comparing it to Frog season!

Advisors can be paid by clients through either a fee OR through commissions and essentially markups (selling concessions and loads primarily). Fees are typically transparent and are a percentage of assets being managed, a fee for advice not based on any asset values, OR a direct payment for service to complete specific projects, such as comprehensive financial planning or business valuations, etc.  Commissions are charges in addition to the market price that a security is bought or sold. These increase the cost of purchase and decrease the proceeds of a sale.  Markups are pretty much just what they sound like. The customer pays $100 for a security, and the advisor receives somewhere between $1-4 of that sale.  The first client statement would reflect a quantity value of $100 but a current value probably less than $100, due in part to the markup and/or current market conditions.  Regulation BI is not taking the side that one way is better than the other. Reg BI is attempting to ensure that clients know how the advisors are being compensated and that no conflict of interest gets in the way of making recommendations.

When operating under the fee arrangement, trades placed in an account are made most commonly when an account is out of balance, tax-loss harvesting, or when investments need to be replaced due to performance or other criteria.  Since there is no additional cost, above the fee, the client can usually feel assured that the trades being placed are justified without wondering if the advisor is doing this just to generate revenue for himself or herself.  Under a commission-based or markup-based arrangement, the client is not paying any fees for asset management.  He or she can go a whole year and not experience one additional cost, however at some time, the account will need to be rebalanced, or the client will need to access funds to spend, so now trades….and costs….come into play.  Costs can potentially cause a client to not take advice that is justified or even worse, necessary. Could it be the advisor is needing to generate revenue? Is the new investment that much better than the one being recommended be removed? Does any of this trading need to take place?  At times, it can cloud the client’s judgment into not making a necessary move for the portfolio.  Time will tell is that non-move is a good one.

Ideally, you are working with an advisor who always works for you and your best interest, and as you can see, there are several things to consider when making these decisions.  I currently operate under both “sides of the house” as a dually registered advisor.  This means that my current and future clients will have a little more information from me to read in terms of disclosures, and I will have a little more documentation on my end.  This does not change the fact that I am still working to help you achieve order in your lives and create a sense of financial peace.  It means I have to operate under 2 sets of rules…….and this brings me to Frog Season!

Yes, Frog season started in MO on Jun 30, and it goes until Oct 31.  For me, frogging is one of those excellent nighttime pursuits that harken back memories of childhood.  Frogging is fantastic because you don’t have to be incredibly quiet, so it’s great for kids, and you don’t need a lot of equipment to do it.  In fact, it can be done with just a flashlight/headlamp and your hands! The object of frogging is, of course, to harvest frogs while having an enjoyable and safe nighttime (usually) experience in the great outdoors.  Frogging, though, compared to other species seems unique in that 2 different permits could be required if you are of the age where permits are needed. 

If you use a .22 rifle or pellet gun, you are hunting, and a hunting permit is necessary.

If you want to catch them using a rod and reel, this is fishing, and a fishing permit is needed. 

How about this…if you use a hand or hand net this is hunting, but grabbing is considered fishing!  I can’t think of an animal or endeavor, where the outcome and goal are the same, but 2 different permits could be required on the same trip.  We don’t hunt for bass, and we don’t fish for squirrels, but we could do both for frogs!

So in this pursuit, neither hunting frogs nor fishing for frogs is right or wrong.  If you want to just catch and release, obviously fishing is what you will do, since shooting them would prohibit an unharmed release. Aside from that scenario, though, both options are perfectly valid so long as you know what permits to follow, and you follow the rules for each one.

Thankfully the MO Conservation Department has a combo Hunting/Fishing permit, which does not eliminate the need to follow the regulations. It does allow you the flexibility to change your tactics in the middle of the endeavor and not have to worry about breaking the law. 

So Jun 30 was a big day for me!  It started one of my favorite summertime activities in frogging, while it ushered in a new era in how I offer advice.  Whether I operate as an advisor, paid by fees, or commissions, my clients and future clients have some additional reassurances; their best interest is always being priority number one. When the day is done, I can grab my kids and a fishing pole OR a .22 pellet gun and go after some of the sweetest tasting meat available this time of year. Since I am covered with the combo fishing/hunting license, I can rest assured knowing I am covered legally for whatever method I choose to pursue these mighty creatures.  Frogs!