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

While the torpedoing of the Massachusetts fiduciary rule by a superior court judge on Wednesday is “tough fiduciary news,” Massachusetts likely “took the wrong approach to begin with” in enforcing its fiduciary rule against trading app Robinhood, popular blogger and advisor Michael Kitces stated Thursday on Twitter.

“Is the way Robinhood promotes stock trading concerning/?” he tweeted. “Oh yeah. But is Robinhood giving ADVICE? No. It’s a brokerage app.”

Robinhood filed a lawsuit in April 2021 to overturn Massachusetts’ fiduciary rule, arguing that Secretary of State William Galvin, Massachusetts’ top securities regulator, exceeded his authority in promulgating the rule.

Judge Michael Riccuiti agreed in his Wednesday ruling.

Galvin’s office told ThinkAdvisor Thursday they were considering an appeal.

In its administrative action, Galvin alleged that Robinhood violated the Massachusetts Uniform Securities Act, by, among other things, “breaching a fiduciary duty that it allegedly owed to its customers when providing investment recommendations or advice,” the ruling states.

Galvin accused Robinhood in mid-December 2020 of violating state law by using overly “aggressive tactics to attract new, often inexperienced, investors” and “gamification to encourage and entice continuous and repetitive use” of its mobile application.

Galvin’s office told ThinkAdvisor on Thursday that the judge ruled Wednesday “on the Secretary’s authority to promulgate the rule as it exists, which obviously could have impacts on the administrative case if the ruling stands. There are aspects of the administrative case unrelated to the fiduciary rule. There are also charges in the administrative complaint relating to failure to supervise.”

Kitces, head of planning strategy at Buckingham Wealth Partners and co-founder of XY Planning Network, noted in a lengthy response on Twitter Thursday that Galvin may have erred in pursuing a fiduciary-related enforcement action related to “Robinhood’s ‘gamified’ brokerage app” — which has now ultimately led to the state’s fiduciary rule being struck down.

“At its core, the debate for more than a decade now is when the advice of a broker-dealer should be regulated AS advice, rather than as a sales recommendation, because we regulate advice at a much higher (fiduciary) standard,” Kitces tweeted.

“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.