Advisor. Broker. Wealth Manager. Financial Advisor. Investment Advisor. Financial Consultant. Financial Planner. Savings Coach. Budget Doctor. Wealth Architect. Money Ninja. Cash Llama.
The regulatory approach to financial professional titles to date has pretty much been “Pick one and have at it.”
Hyperbole aside, I’m far from the first person to observe that the various titles donned by financial services professionals are as clear as mud — especially from the perspective of the investing public. But there is at least one particular title that has been legitimized as a profession, supported by an official board of standards, and subject to specific regulatory guidance: financial planner.
The term “financial planner” has not been defined by the Securities and Exchange Commission, and it does not make a single appearance in the Investment Advisers Act of 1940. Even amongst industry practitioners, what constitutes “financial planning” is far from universally accepted.
But the CFP Board’s Standards of Professional Conduct defines financial planning as “the process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas.” It goes on to explain that these financial planning subject areas generally include, but are not limited to: (1) Financial statement preparation and analysis (including cash flow analysis/planning and budgeting), (2) Insurance planning and risk management, (3) Employee benefits planning, (4) Investment planning, (5) Income tax planning, (6) Retirement planning, and (7) Estate planning.
But which of these subject areas and activities trigger the need to register as an investment adviser? Is an individual that limits his services to client budgeting and cash flow analysis, for example, subject to the same regulatory regime as another individual that instead focuses on investment planning?
Both federal and state securities regulators have wrestled with the concept of financial planning for decades. On the federal level and since at least the 1970s, the SEC has issued various no-action letters, releases, administrative actions, and even a subsequently vacated rulemaking in an attempt to fit the financial planning community into a regulatory box. The North American Securities Administrators Association (NASAA) has been a bit more direct, and has explicitly incorporated the concept of a financial planner into its Uniform Securities Act (which many states have adopted wholesale or in part).
The seminal no-action letter out of the SEC — issued jointly with NASAA — is Investment Advisers Act Release No. 1092: Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services. As if its title is not self-explanatory enough, the release itself states that its goal is to “provide uniform interpretations about the applicability of federal and state adviser laws to the activities of financial planners and other persons.”
To determine if a financial planner is subject to federal or state investment adviser laws, we must first confirm our understanding of the term “investment adviser.” Section 202(a)(11) of the Investment Advisers Act of 1940 does just that, and defines “investment adviser” to mean:
… any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities…
There are several categorical exclusions from the definition of investment adviser, of course, but they need not be addressed for the purposes of this article.
For a financial planner to be considered an investment adviser, the financial planner must thus (1) provide advice, or issue reports or analyses, regarding securities, (2) be in the business of providing such services, and (3) provide such services for compensation. This is the three-part “ABC” test you may remember from a Series 65 or 66 exam.
The release scrutinizes this three-part test for its application to financial planners, and comes to several important conclusions as summarized below:
- A person who provides advice, reports or analyses concerning securities, even if not specific securities, is an investment adviser.
- A person who advises clients as to the relative advantages and disadvantages of investing in securities in general is an investment adviser.
- A person who advises clients with respect to the retention of an investment manager is, under certain circumstances, an investment adviser.
- Giving investment advice need not constitute the principal business activity of a person for that person to be considered an investment adviser. It need only occur with some regularity.
- The “in the business” element is satisfied if a person holds himself out as one who provides investment advice, receives any separate/additional compensation for advice concerning securities, or, on anything other than rare, isolated and non-periodic instances, provides specific investment advice.
- The “compensation” element is satisfied if a single fee is charged for a number of different services; it is not necessary to charge a separate fee for the investment advisory portion of the total services, and it need not be paid directly by the person receiving the investment advisory services.
As alluded to earlier, NASAA’s Uniform Securities Act explicitly defines “Investment Adviser” to include financial planners. NASAA adopted this clarifying amendment to include financial planners in 1986, largely in response to Investment Advisers Act Release No. 770 (the predecessor to Release No. 1092). However, Comment No. 15 to the Uniform Securities Act goes on to say that:
The provision defining an “investment adviser” to include financial planners […] should not be construed to mean that all financial planners fall within the definition by virtue of their designation as “financial planners.” Financial planners rendering advice exclusively in such nonsecurities areas as insurance and budget management, for example, would not be covered by the definition. However, persons offering “total financial planning” would be holding themselves out as providing investment advisory services. For similar reasons, the drafters thought it inappropriate to define an “investment adviser” as “a person who holds himself out as a financial planner.”
Similar to the Release No. 1092, whether a financial planner is subject to the investment advisory regulatory regime under the Uniform Securities Act hinges on whether the financial planner is providing advice related to securities or not, and whether she holds herself out — even indirectly — as providing investment advisory services.
Again, the Uniform Securities Act is a model act, and each state’s respective securities laws (and interpretive guidance) may take a different approach that should be investigated by financial planners that are on the fence.
To answer the original question posed at the beginning of this article, as usual the answer is “it depends on the facts and circumstances.” Some financial planners should unquestionably be registered as investment advisers, and others not necessarily so. If I can offer any advice to financial planners wrestling with a registration decision, it is this: Don’t get too cute with the law; operating as an unregistered investment adviser is not a charge worth risking.