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October 30, 2017 at 08:00 PM
One event in the Institute for the Fiduciary Standard’s “Fiduciary September” this year was a webinar on “Broker/Adviser Titles: Potential Rulemaking at the SEC.”
The webinar addressed the numerous and varied titles used by today’s financial advisors, whether they caused confusion among retail investors and, if so, what might be done by the Securities and Exchange Commission to rectify the problem.
Surprisingly, the speakers revealed that this is not a new issue and it dates back at least to the 1940s. What’s more, the SEC studied the problem as recently as 2008 but has not taken any action to address it, despite a mandate to do so in the 2010 Dodd-Frank Act.
The first speaker, James Allen, head of Capital Markets Policy for the Americas at the CFA Institute, said that in 2013, “Our Investor Advisory Committee noted investor confusion, and recognized the benefits of a ‘title-based’ approach. The Committee recommended that brokers not use the term ‘advisor,’ or give investment advice. Then, in a letter 2015 to the DOL, the CFA wrote that ‘only those subject to ‘40 Act or ERISA be allowed to use the titles ‘advisor’ or ‘adviser.’ And, in 2017 we addressed a letter to the SEC on ‘truth in advertising,’ stating that brokers ‘should be clear about their titles, and where they stand with their clients’ interests.’”
The second speaker, Brian Hamburger, a securities attorney and president and CEO of the consultancy MarketCounsel, spoke about the impact of conflicts of interest on the issue of titles.
“Back in 1995, broker compensation was still limited to commissions on transactions,” Hamburger said, “and the SEC was concerned about potential conflicts of interest. That year, the Commission released its ‘Tully Report’ on compensation practices, identifying conflicts and recommending best practices to reduce or mitigate them. The report concluded that commissions ‘worked,’ but that they do create conflicts that can harm the interests with clients.”
According to Hamburger, the SEC decided that moving the securities industry toward “fee-based accounts would be a good solution to align the interests of brokers with those of investors.” In his view, this is when today’s investor confusion started.
“By 2005, brokerage firms had started to advertise themselves as investment advisors, rebranding brokers with titles such as: financial advisors, financial consultants, investment representatives, etc. And the 2007 SEC RAND report confirmed the resulting investor confusion about the differences between investment advisors and brokers.”
