Industry Spotlight > Broker Dealers

A Simple Solution: Let's Call an Advisor an Adviser

Your article was successfully shared with the contacts you provided.

Over the past year or so, many advisor industry observers (Ron Rhoades, Knut Rostad and Bob Veres, to name a few), including this one, have become disillusioned about the Securities and Exchange Commission’s chances of actually complying with its Dodd-Frank mandate to create a fiduciary standard for brokers that’s “no less stringent” than the 1940 Act standard for investment advisors. I believe I capture the sentiments of this group in saying that the commission’s support for issues put forth by financial services industry groups—such as business model neutrality, access to advice, disclosure remedies and, most recently, the economic impact of a higher broker standard—quite clearly indicates a lack of seriousness about increasing investor protections.

Consequently, many of us have started advocating a “market solution”: the creation of a profession of “fiduciary-only advisers”—note the spelling—that would dramatically demonstrate the differences between themselves and brokers, thereby forcing the brokerage industry to follow suit (similar to the fee-only experience). So, perhaps you can imagine my surprise the other day when reading an email from a financial planner who offered a brilliantly simple, clear and (at least in my opinion) workable solution to the fiduciary question that I haven’t yet seen anyone propose. It was one of those moments that I’ve come to cherish as a journalist, when I sit back and mutter to myself: “Of course! Why didn’t I think of that?”

That email was written by David Maurice, a fee-only financial planner at Carrier & Maurice in Johnston City, Tennessee. It contained a comment letter that Maurice had submitted to the SEC last August in response to its request for information regarding the “duties of brokers, dealers and investment advisors.” The letter starts with Maurice’s observation, based on many years as a broker (before he became a fee-only advisor) that brokers will never be “fiduciary advisers” and that efforts to make them so are misguided and misleading.

“In my experience, the overwhelming financial incentive across the financial services industry does not align with the best interests of retail investor consumers,” he wrote. “As a professional, it was an ever-present challenge for me to serve clients’ best interests in competition against the opportunities presented by the overwhelming majority of product purveyors. The conflict of interest is to increase one’s own financial benefit and that to the additional expense of retail investors. I believe that I did a good job of meeting that challenge in good conscience. But the fact that it was a challenge is the issue for retail investor consumers who are clearly unaware of the scope and depth of the conflict. And I believe that the current business model of the broker-dealer makes this challenge inescapable.”

Maurice added, “There is simply no way, in language or in fact, to maintain an ultimate duty to two different masters with competing objectives. This is a fairly ancient principle, which is unlikely to be overturned by modern linguistic gymnastics.”

To my mind, this observation is concretely rooted in common sense and strikes to the heart of the Dodd-Frank mandate: a fiduciary standard for brokers is a dumb idea, which, frankly, we all should have seen from the start. That’s not to say that increasing investor protections is a bad idea. Rather, that doing it by trying to make brokers act like fiduciary advisers is simply doomed to fail. Maurice put it this way: “I have yet to see or hear any proposal that shows how the current standard or one ‘no less stringent’ can be made to apply uniformly to the current form of the broker-dealer business model, while serving simultaneously to eliminate the confusion that exists in the mind of retail investor consumers.”

In place of the unrealistic Dodd-Frank initiative, Maurice proposed that the commission focus on clarifying the distinction between brokers and fiduciary advisers: “In the mind of retail investors the term ‘financial advisor’ is indistinguishable from ‘investment adviser.’”

Maurice wrote that in his time as an advisor, he has “yet to encounter a client or prospective client who was not stunned to learn what the differences [between a broker and an advisor] mean to them as consumers.” He urged the commission to consider the financial cost incurred by consumers “whose understanding of the duty owed by the broker providing that advice is pervasively and severely flawed.”

His advice is simple: Forget about a fiduciary standard for brokers and focus on making sure that investors understand the difference between a broker and an investment “adviser.”

From his writing, I don’t believe it’s Maurice’s (nor is it my) intention to suggest that there’s anything wrong with the brokerage profession. People who manage their own investments often know which stocks, bonds or mutual funds they want and need the assistance of a broker to buy them. But it also shouldn’t be hard for people who want investment advice to get it.

I should note that others have come to similar conclusions. In a Nov. 21 letter to the SEC, the Consumer Federation of America, together with the CFP Board, the FPA and NAPFA put the blame for investor confusion about brokers and advisors on the SEC (see “In the Broker Harmonization Debate, the SEC Is the Real Problem”): “It is the commission’s past actions, and inaction, that have been primarily responsible for blurring the lines between broker-dealers and investment advisors. […] For far too long, commission policy has allowed broker-dealers to market themselves to the public as trusted advisors without imposing the fiduciary standard appropriate to such a relationship of trust.”

Bob Veres recently wrote for, “First, let’s push for clarity in the terminology. No matter what they have on their business cards, employees of a brokerage firm should be characterized as brokers and should be required to identify themselves as such to consumers who walk in the door. [Conversely,] advisors who register with the SEC under the Investment Advisers Act should be required to describe themselves as advisors. ”

While the CFA and the Financial Planning Coalition didn’t pull any punches in its rebuke of the SEC, nor did Veres, I think it’s fair to say that neither they, nor anyone else, have drawn the inescapable conclusion as powerfully—or as simply—as Maurice: Brokers will never act like fiduciaries, therefore, the best consumer protection is to enable investors to clearly distinguish between brokers and fiduciary advisers. What’s more, Maurice’s solution provides a platform, and a boost, to the “market solution.”

The need for a clearly understandable distinction between brokers and fiduciary advisers is a powerful reason for creating a new profession of fiduciary advisers. What’s more, it could form the basis of the public and media campaigns of such a profession, and provide a base for pressuring the SEC into helping to solve the advisor/adviser problem. It could also, possibly, radically change the retail financial services industry.

“When consumers understand the duties and protections afforded under the fiduciary standard of the Investment Adviser Act of 1940,” wrote Maurice, “it is likely there will still remain a marketplace for brokers. But that marketplace would drive a radical reformation of the broker-dealer model under the pressure of competing with independent RIAs currently operating under the fiduciary standard of the Act.”

Of course, that won’t happen as long as “financial advisors” are allowed to assume the mantle of “investment advisers.”