Could clearing up the decades-old confusion over the role of a broker compared to that of an investment adviser be as easy as clarifying their professional titles?
So-called title reform has recently emerged as a serious consideration as the Securities and Exchange Commission sets out to put forth a
proposal creating a new fiduciary standard in the financial advice industry.
To some, title reform offers a simple and straightforward solution. To others it is a dangerous concept that would create two tiers of advice-givers and spur some in the industry to come up with ways to work around the new rule.
Unlike the
Labor Department's fiduciary rule, which jams investment advisers and brokers into one advice standard, title reform underscores the line separating an adviser, who is held to a fiduciary duty, and a broker, who meets the lesser suitability requirement. It aims to differentiate the two roles by limiting who can call themselves a "financial adviser," a label many brokers use on business cards and in advertising.
Is this the silver bullet we've all been waiting for? The fix would be an easy one, rather than requiring hundreds of pages of new regulations. In fact, it would even be based on existing rules. And it would be comprehensive, applying to anyone working with clients to improve their financial lives.
"We're hoping that it will play a significant role because it is an action the SEC could take immediately without going through the whole political process," said Harold Evensky, chairman of Evensky & Katz/Foldes Financial and a member of the Committee on the Fiduciary Standard. "It's a commonsense, mom-and-pop solution to the issue of distinguishing the relationship between the professional and the client."
But nothing is ever as simple as it may first appear.
"If you see the two terms side by side, the ultimate effect is to create a pecking order with a competitive advantage," said Gary Sanders, counsel and vice president of government relations at the National Association of Insurance and Financial Advisors. "It's not the regulators' role to give a competitive advantage to one segment of players over another."
Ensuring fairness to different business models while wading into the delicate territory of who really has their clients' best interests at heart is what
SEC chairman Jay Clayton is navigating today. Title reform likely will be part of the Securities and Exchange Commission's fiduciary proposal, which is expected to be released later this year.
(More: Fiduciary groups urge SEC to prevent brokers from using 'adviser' title)
In testimony before the Senate Banking Committee in early February, Mr. Clayton tried to assure Sen. Elizabeth Warren, D-Mass., that the SEC's proposal would not be weaker than the Labor Department's fiduciary rule, which requires brokers to act in the best interests of their clients in retirement accounts.
Defining the relationship
But his response to Ms. Warren focused on more clearly defining the relationship between advisers and brokers and their clients.
"My main objective is to bring clarity to that without jeopardizing investor protection," Mr. Clayton said.
He returned to the subject later in the month at the
Practising Law Institute's SEC Speaks conference in Washington.
In a colloquy with Mr. Clayton, former SEC chairman Harvey Pitt stressed the importance of requiring all advisers to act in their clients' best interests and said, "It may be that getting rid of labels [is] a way to achieve the ultimate objective."
Mr. Clayton said he was right, but only up to a point.
"You can't do [a fiduciary rule] unless you get to the substance of what the labels mean," Mr. Clayton said. "We've got to get to the substance of what the labels mean."
SEC commissioner Michael Piwowar has pushed for title reform to be part of the SEC's fiduciary proposal.
"You shouldn't be able to use the word 'adviser' or 'advisor' — spelled with an 'e' or an 'o' — unless you are subject to the investment adviser fiduciary standard," Mr. Piwowar told reporters at SEC Speaks. "So, prohibit terms like 'financial adviser' or 'wealth adviser' unless you are an investment adviser."
As title reform catches on inside the SEC, supporters have been pushing the approach.
Proponents say it is a clear-cut solution whose time has come and doesn't require legislation or new rulemaking from the SEC. All the agency has to do is enforce the so-called broker exception in the
1940 Investment Adviser Act.
We're hoping that it will play a significant role because it is an action the SEC could take immediately without going through the whole political process."
Harold Evensky, chairman of Evensky & Katz/Foldes Financial and member of the Committee on the Fiduciary Standard
Under the exception, a broker is not an investment adviser if the advice she gives to a client is "solely incidental" to a sales transaction. But if a broker wants to dispense personalized financial advice, she has to be a fiduciary and register as an investment adviser.
Both the CFA Institute and the Committee for the Fiduciary Standard sent
comment letters to the SEC in January calling for title reform. Their advocacy echoes a recommendation by the SEC Investor Advisory Committee back in 2013 that the agency narrow the broker exclusion in the Investment Advisers Act.
Kurt Schacht, managing director of the CFA Institute and former chairman of the Investor Advisory Committee, wants to see the relationship between a client and an investment adviser or a broker be as crystal clear as that between a home buyer and a real estate agent.
In the real estate world, there isn't any question that the agent is working on behalf of the seller of the property, he said, because that dynamic is spelled out at the very beginning.
Confused clients
When it comes to retail investment advice, the relationship established across the desk between client and financial professional is murkier. Clients may be working with investment advisers, who must meet a fiduciary, or best-interest, standard. Or they might be working with brokers, who must sell products that meet the client's objectives and risk appetite but can recommend investments that give the broker the biggest fee or commission.
The client may be confused because in both cases the professionals on the other side of the desk can hold themselves out as "financial advisers," blurring the lines of distinction.
And this is what really burns some advocates for title reform.
"If you're going to do personalized advice and call yourself an adviser, you just have to give a fiduciary duty; that's all there is to it," Mr. Schacht said. "If you want to be a broker-dealer — you still want to be just a salesperson — that's fine, but you can't call yourself a financial adviser."
But groups representing brokerage and insurance professionals aren't warming to the idea of clarifying title usage. They say reform that draws lines of demarcation between brokers and investment advisers isn't fair because it puts them in a lower caste.
"Groups pushing this reform have a vested interest in this type of reform going through," said Mr. Sanders of NAIFA.
Brokers and insurance agents are advisers, too, opponents of title reform argue. Especially in small towns, such professionals are trusted to provide guidance on a whole range of financial issues. Mr. Sanders asserts that NAIFA members are acting in the best interests of their clients no matter what they're called — if they weren't, they would lose their clients.
The Financial Services Institute, which represents independent broker-dealers and advisers, also is resisting title reform.
"At first blush, the regulation of titles looks like a simple and elegant solution," said David Bellaire, FSI executive vice president and general counsel. "But in practice, we think it falls short."
Many of FSI's members are dually registered. Title reform would make client-adviser conversations awkward if they involved both advisory and brokerage accounts.
"They work in a holistic way," Mr. Bellaire said. "Trying to switch back and forth between their different roles and expecting clients to keep it straight is something we don't think is workable."
Lawmakers are now weighing in on title reform.
Study the alternatives
The Financial Choice Act, sponsored by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, was approved by the full House last year. It contains a provision that eliminates the DOL fiduciary rule and instructs the SEC to promulgate a best-interest standard for brokers. But it also would require the SEC to study whether alternatives are available, including "simplifying the titles used by brokers, dealers and investment advisers."
Legislators on the state level are getting into the action, too. In January, a
bill was reintroduced in the New Jersey legislature by state Sen. Patrick J. Diegnan Jr. that would require advisers who are not held to a fiduciary duty to make a compulsory statement to clients that they do not meet that standard.
If you see the two terms side by side, the ultimate effect is to create a pecking order with a competitive advantage."
Gary Sanders, counsel and vice president of government relations, National Association of Insurance and Financial Advisors
The SEC is promising to produce its fiduciary rule this year, in part because it is trying to catch up and coordinate with the Labor Department, whose own rule partially went into effect last year. The DOL has delayed some provisions
until June 2019 while it reassesses the regulation under a mandate from President Donald J. Trump that could lead to major changes.
When the SEC makes its proposal, it will be a milestone on the way to a uniform fiduciary standard, with a long road still ahead.
Mr. Schacht sees title reform as a way to achieve an immediate fiduciary victory "that doesn't preempt continued work on a uniform fiduciary duty between the DOL and the SEC," he said. "We're simply saying that in the interim, when we've waited over three decades the way it is, let's just bring complete transparency around the way business operates today and require what the rules already say, which is, if you're an advice-giver, you have to be a fiduciary."
Neither advocates nor opponents say title reform alone can raise investment advice standards.
"It's a meaningful dimension but not the whole solution," said Blaine Aikin, executive chairman of fi360 Inc. "It's not a silver bullet. One of the disadvantages of pure title reform is that you have the whack-a-mole dilemma."
One restricted title going away simply to be replaced by another new, confusing title is also a problem that concerns Lawrence P. Stadulis, a partner at Stradley Ronon Stevens & Young.
(More: How new leadership at DOL could address retirement rules)
"In a title-reform approach, one of the difficulties is which specific titles are subject to reform?" Mr. Stadulis said. "Firms can avoid fiduciary duty by not using the specific terms or coming up with new ones."
Title reform is "an essential part but by no means the entire part of getting rid of investor confusion," Mr. Piwowar said.
If the SEC settles on a hard-and-fast rule about who can present themselves as a financial adviser, it might promote a false sense of security for advisers and clients. If the person providing the financial advice is an adviser, then everything is OK, right?
Not necessarily, said Don Trone, founder and chief executive of 3ethos, a research and training firm. Just because someone is using the adviser title doesn't guarantee that he or she will get all the details right in serving as a fiduciary.
A better option than title reform is a "plain English" best-interest standard, said Judi Carsrud, NAIFA assistant vice president of government relations.
"It's the best way to end the confusion," she said.
