6 December 2021

Petitions Ask SEC to Clear Confusion Over Advisors vs. Brokers

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With the lines between financial advisors and stockbrokers increasingly blurred, ordinary investors are confused more than ever — and some advisors aren’t happy about the muddle.

A consortium of financial planners and a prolific industry commentator are urging the SEC to wash away the confusion, submitting two petitions aimed at nudging Wall Street’s regulator to issue rules clarifying just who can call themselves advisors.

Anyone can petition the SEC, whose primary mission includes protecting investors. While doing so rarely leads to results, it can raise the profile of a hot-button issue. Law firm Gibson Dunn wrote that under new SEC chair Gary Gensler, it expects “increased emphasis on the conduct of institutional market participants,” including investment advisors and broker-dealers.

Financial advisors who operate independently of Wall Street and of independent brokerages are held to tougher standards than brokers when it comes to protecting clients. With a fiduciary responsibility to always put a customer’s best financial interests ahead of their own and avoid conflicts of interests when suggesting investment advice or products, advisors must hew to the securities industry’s gold standard of investor protection.

At the same time, brokers are increasingly offering financial advice and wealth management services that step into the turf of advisors. But brokers aren’t beholden to the stricter standards that advisors must abide by. Instead, they’re accountable to the lesser “best interest” standard, known as Reg BI, which says they only have to recommend “suitable” investments and merely disclose conflicts of interest, not avoid them.

Two related petitions filed Monday with the Securities and Exchange Commission ask Wall Street’s regulator to draw a brighter line. Submitted by XY Planning Network, a nationwide consortium of registered independent advisors (RIAs), and Michael Kitces, a co-founder of the group and the head of planning strategy at Buckingham Wealth Partners, a $52 billion firm that’s both an advisor and a broker-dealer, the two documents ask the SEC to tighten up a 1940 rule and revive a recently stalled one.

One petition asks the SEC to issue rules “modernizing” its interpretation of a core part of the Investment Advisers Act of 1940, a landmark law that distinguished between fraudulent stock tipsters and legitimate financial planners, a then-emerging profession. The 1940 rule says that only advisors can market themselves as what were then called “investment counselors.” Brokers cannot.

The phrase “investment counselor” has long since fallen by the wayside. In its place are monikers like financial planner, financial advisor, wealth manager and wealth advisor, all used commonly by Wall Street brokerages. The titles, the petitioners ague, should apply only to those held to the higher fiduciary standard.

In June 2020, the SEC required brokers and brokerage firms to stop calling themselves an “advisor.” But it said nothing about similar terms like “wealth manager” or “financial planner,” and brokers, who are essentially salespeople, still market themselves as such.

There’s a “continuing convergence of broker-dealers and investment advisors into this advisory function,” even though brokers aren’t regulated as advisors, Kitces told a webinar on Sept. 17. He added that anybody who presents themselves to the public as a financial advisor or offers financial planning services should be held to the fiduciary standard.

“Don't say you offer financial planning,” he said. “Say you're a broker.”

The second petition calls for the SEC to revisit a stalled 2007 proposal to restrict brokers from marketing themselves as financial planners, offering financial planning services or delivering a financial plan.

In 2005, the SEC ruled that brokers could provide fee-based accounts to customers while not acting as fiduciaries, as long as they made certain disclosures. Fee-based services involve a client paying a percentage of her assets under management.

Known as the Merrill Lynch rule, the provision required brokers who provide financial advice to register as independent advisors. But it also gave a pass to broker-dealer firms if the advice was “solely incidental” and disclosed to the client.

A federal appeals court struck down the Merrill Lynch rule in 2007, meaning that brokers charging fees for managing accounts based on a percentage of a client’s assets were subject to the higher fiduciary standard. Brokerages got around the rule by turning themselves and their brokers into hybrid broker-advisors, avoiding having their brokers subjected to the higher fiduciary standard.

The SEC responded that year proposing a reinstatement of the vacated rule, but the proposal has languished.

Kitces, a certified financial planner (CFP), said that the SEC needs to finalize its proposed reinstatement “to make clear, as Congress intended” in its 1940 rule, that “brokers can’t call themselves planners.”

In 2019, XY Planning and a coalition of states sued the SEC seeking to force it to overturn the weaker Reg BI standard, which was approved in June 2019. The lawsuit argued that the standard gives a deceptive cover to brokers who provide personalized advice without having to meet the fiduciary obligations that govern advisors. A federal judge in Manhattan district court dismissed the claim in October 2019.

Kitces said things get especially blurred when a stock broker works for a “hybrid” RIA and is registered as both a broker and an advisor (like his St. Louis-based firm Buckingham Wealth). Some 299,613 individuals are registered as both advisors and brokers, according to the Financial Industry Regulatory Authority. Meanwhile, 317,936 individuals are registered as pure brokers. That means 44% of all advisors wear two hats when dealing with clients. FINRA, which is overseen by the SEC, oversees brokers and advisors.

XY Planning said in a statement about the petitions that “stockbrokers (especially dual registrants) and their firms have actively marketed their services — including financial planning — no differently from advisors who operate under a much higher fiduciary standard.” The Bozeman, Montana-based group, which includes 770 independent advisors, added that the “broad use of advisor-like titles while continuing to operate a more conflicted, sales-driven implementation model” only confuses consumers.

It’s a point supported by data. Retirement savers lose at least $17 billion a year from excess costs associated with conflicted retirement advice, according to a 2015 study by White House economists. Brokers and insurers, including Charles Schwab, Raymond James and Morgan Stanley, create “the belief and expectation on the part of investors that they are providing fiduciary investment advice rather than non-fiduciary investment sales,” according to a 2017 Consumer Federation of America report.

“Anyone who uses the title ‘advisor’ or a similar title that conveys advice should be subject to a fiduciary standard of conduct,” said Kevin Keller, the chief executive officer of the Certified Financial Planner Board of Standards. He added that the CFP Board was “currently working on finding how many CFP certificants are registered as brokers/working at broker-dealer firms.”

Asked why XY Planning was now taking another stab at the broad issue, Kitces cited the pro-consumer stance of Gensler and his recent appointment of Barbara Roper as his senior advisor. Roper is the former director of investor protection at the Consumer Federation of America.

Kitces also cited the growing trend of brokers earning CFP certifications and becoming financial advisors — resulting in consumers falsely thinking that they’re getting objective financial advice when, instead, they’re being sold a mutual fund or annuity that throws off commissions for the broker. Advisors are paid a fee, not a commission for their investment recommendations, so they don’t have a conflict of interest.

“If you ask anyone off the street what the difference between an RIA and a broker is, they have no idea,” Kitces told the webinar. Meanwhile, “the difference between an advisor and a salesperson, anyone can tell.”

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