Some 20 years ago or so, when I was a senior editor at Worth magazine (can it really be that long ago?), I hosted a weekly live TV show on CNBC, in which viewers would call in with questions about investing and their personal finances. Even though live call in with a large viewing audience feels a lot like a high-wire act without a net, I enjoyed the experience very much. However, the folks at Fidelity Investments, which owned Worth at the time, weren’t as enthusiastic, seeing more potential downside than upside.
After some discussion, they gave us the go ahead, with the caveat that I spend some time with our securities compliance attorney. As it turned out, despite the First Amendment, there are both laws and a considerable amount of case law regarding just what constitutes “investment advice” in publishing, which has been expanded to include broadcasting. Who knew?
Our attorney explained much of it, and then boiled it down into one usefully simple statement: “When you’re on the air (or in print), and you give your opinions about various investment products and strategies, and the types of situations under which they might be beneficial to investors, that’s just your opinion. But, if you tell someone what she or he ‘should do,’ that’s investment advice.” And since I wasn’t an RIA, that would be a problem.
I tell you that story to illustrate that the law takes providing investment advice very seriously (in case you missed that day in your CFP or Series 65 class). It’s the case even for philosophy majors who, through no fault of their own, end up on television. And also to point out that this seriousness is much more than regulatory zeal: in our complex society, professional advice is a serious human matter. We both want to and need to be able to rely on the advice we get from our doctors, lawyers, accountants, dentists, etc. And, as measured by impact on our lives, financial advisers fall somewhere near the top of that list.
That’s why I’m surprised at the tenor of the discussion that’s taken place in the advisory community of lately, about the usage of the monikers ‘adviser’ and ‘advisor,’ notably in an Investment News poll. Apparently, many in the community seem to feel the issue is trite to say the least—a distinction that’s purely subjective, and taken seriously only by those rigid-thinking sticklers who point out that ‘impact’ is not a verb, and that ‘irregardless’ is not a word at all.
Sadly, many of these commenters seem to miss the real point entirely. As you probably know, the reason that anyone uses the spelling “adviser” today is because the word was spelled that way in the Investment Advisers Act of 1940. That was the law which, in the aftermath of the 1929 stock market crash and the resulting Great Depression, was enacted to provide retail investors with greater protections in their relationships with financial advisers: including a fiduciary duty for RIAs to act in the best interest of their clients.
However, the ’40 Act also carved out an exception for brokers who offer “advice that is usual and incidental to the sale of securities.” Brokers were/are not considered “advisers,” and therefore, do not have to register as RIAs under the oversight of the ’40 Act. In my view, the so called “broker exemption” was a mistake that has plagued retail investors since 1940. However, the ’40 Act enabled knowledgeable investors (of which, as far as I can tell, there are very few) to rely on RIAs to provide financial advice in their best interest. And, as I understand it, anyone holding themselves out as an investment adviser, or financial adviser, can be held to the higher standard of an RIA.
But of course, it didn’t take long before brokerage firms and brokers themselves to realize that most retail investors would much prefer to get investment ‘advice’ rather than a sales pitch. So, they began to refer to themselves as investment or financial ‘advisors,’ so as not to run afoul of the ’40 Act. And for reasons that have baffled me for over 30 years, the SEC and the courts allowed them to get away with this verbal legerdemain that confused investors in the process.