SEC Leaves 61% of Registered Representatives Exempt From Its Adviser Rules

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We have been critical of the Securities and Exchange Commission (SEC) for claiming to set fiduciary regulations that favor consumers which in fact favor broker-dealers by continuing to allow them to pretend to be advisors who have your best interests.

Mark Shoeff Jr. writing for investment news reports in “SEC Advice rule contains a huge hole :

While some brokers will be forbidden to use the title financial adviser or advisor, another few hundred thousand will still be able to do so. The Securities and Exchange Commission’s goal of tackling investor confusion won’t be met for people working with the growing number of dually registered advisers. The title ban does not apply to those registered as both brokers and advisers — even when that person has their broker hat on.

“Our proposal would not prohibit dually registered firms or dually hatted financial professionals from using ‘adviser’ or ‘advisor’ in their names or titles, even in circumstances where the firm or financial professional provides brokerage services to a particular investor,” the proposal states.

This is a Mack truck-sized loophole that a large portion of the financial advice sector can drive through. The SEC estimates that 61% of registered representatives work at dually registered firms. The agency also found that 72% of registered representatives working at firms with between $1 billion and $50 billion in assets under management are with dually registered firms.

While the SEC’s latest regulation restricts the term “advisor” and “adviser”, the latest loophole exempts 61% of registered investment advisors from this regulation and 72% of the largest firms are exempt from this rule.

Another way of thinking about government regulations is that 72% of the largest broker-dealers welcome this rule because it allows them to use a term regardless of if it is true or not, and prevents their smaller competition from using the term no matter how true it might be of them.

This is called “regulatory capture” and is quite common in government regulatory agencies such as the SEC.

In addition to this mistake, so far the SEC has:

That consumers continued to put their money with anyone other than a fee-only fiduciary advisor amazes me.

Broker-dealers have always argued that without commission-based sales people, there would be no financial services to the mass markets. Our firm did have minimums, but we specialized in a very high level of comprehensive service for clients. Given our previously high minimums, I felt conflicted in my criticism of this argument despite knowing that there were other fee-only firms who served smaller clients.

Now that we have lowered our minimums to zero through our “Do-It-Yourself” service level, everyone can have a fiduciary standard of care for their investments.

Photo by Amir Mohammad HP on Unsplash

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.