Kitces: The Big Mistake That Led to Massachusetts Fiduciary Rule's Demise

“As #FinTech increasingly automates stock brokering (original business of broker-dealers), and B/Ds increasingly shift to the Assets Under Management (AUM) model, brokerage sales and advice channels have converged, giving the same advice but subject to different standards,” Kitces tweeted.

He continued: “This ‘Great Convergence’ of the channels is causing a regulatory backlash – regulators stepping in to say ‘wait a minute, if you’re going to give advice regardless of what channel you’re in, we’re going to regulate you like advisors regardless of what channel you’re in.’”

Kitces noted that “Massachusetts has long been recognized as a leader in regulatory enforcement against the industry, so it wasn’t surprising that they took one of the first and most aggressive stances, that advice from broker-dealers would be regulated as advice, not brokerage.”

However, this was a problematic approach, he continued.

The “Department of Labor originally pursued the same strategy, & the financial services product industry ultimately had it struck down by insisting that brokers and agents are ‘just’ salespeople and not advisors.

“In this context, it was concerning when Massachusetts pursued @AskRobinhood under its new fiduciary rule for Robinhood’s ‘gamified’ brokerage app.”

Kitces noted that “Even to the extent that individual brokers at broker-dealers are increasingly giving advice (that probably should be fiduciary), no one was suggesting that #FinTech apps for trading are (fiduciary) advice vehicles. Concerning behavior, yes. Concerning ADVICE behavior, no.”

Accordingly, Kitces continued, “it’s not entirely surprising that the judge determined that Galvin’s use of the fiduciary rule to regulate a stock trading app was an overreach of its regulatory authority. This wasn’t even the context for a fiduciary rule on brokers in the first place!”

The bad news: “by pursuing a ‘less-than-ideal’ high-profile case to enforce its already controversial fiduciary rule against broker-dealer advice, Massachusetts has now gotten its rule struck down, and put yet another problematic case law precedent on the books,” Kitces said.