SEC Still Allows ‘Advisor’ Confusion

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A great deal is being made that at the end of June 2020, only financial professionals registered as investment advisors can call themselves “advisors” or “advisers.”

Consumers who are looking for a financial advisor are generally looking for someone who knows something about finance. Alas, almost anyone can call themselves a financial advisor. It does not require that you have a legal obligation to put your clients’ interests first. Nor does it require any special education, training, or certification. Just about anyone can call themselves a financial advisor.

Does the Securities and Exchange Commission’s (SEC’s) ruling address any of this concern? No, it does not.

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.

All the dual-registered firms – those registered as a broker-dealer as well as an investment advisor – are able to use the term “advisor” while being exempt from any fiduciary responsibility. In other words, the SEC’s ruling is really more about the place you happen to work rather than any requirements, credentials, or even ethical obligations.

Real advisors are subject to a fiduciary duty, an ethical and legal obligation to act in the best interest of another party. This fiduciary duty is the highest moral obligation and has a long legal history. Simply put, the term “fiduciary” applies to those who have the legal responsibility to manage other people’s money. Fiduciaries are required by law to act in the best interests of their clients, beneficiaries or retirement plan participants.

If your advisor is not a fiduciary, he or she has no legal obligation to act in your best interest. Few of those working in financial services are fiduciaries, so the odds are your advisor is probably not.

Meanwhile the dual-registered advisors of broker-dealers are only subject to a newly created standard, misleadingly called Regulation “Best Interest” which means exactly the opposite of its name. Their allegiance is to their broker-dealer employer. Their obligation to you is simply to disclose their conflicts of interest. But disclosures are not sufficient to fulfill the fiduciary duty.

Having a financial advisor who does not have custody of your assets gives you an extra layer of accountability and oversight. Fiduciaries review potential custodians to determine the best one to house their clients’ assets. They analyze the fees and expenses charged in exchange for the services offered. Then fiduciaries keep an eye on the chosen custodian on behalf of their clients.

The safeguards and monitoring of both advisor and custodian work in parallel to create more accountability. The custodian sends its own set of statements, a way for you as the investor to double-check what your financial advisor is telling you. Being defrauded is much less likely to occur when you are receiving independent statements. Your custodian has an important role to play. But that role is confused and conflicted when they also serve as your financial advisor.

This new rule that means that 28% of financial professionals who call themselves “advisors” are now subject to a fiduciary standard. The rule hardly seems worth the effort.

In “Brokers accept proposed SEC rule on who can call themselves an adviser ” Ryan W. Neal quotes Ron Carson,

Ron Carson, founder and CEO of the Carson Group, called the SEC’s proposal a step in the right direction, but that it needs to go further and require everyone to act as a fiduciary.

“Unfortunately, a large majority of investors are under the impression that that is already the case, and are completely unaware that many of the financial professionals with whom they do business are under no obligation to prioritize their best interests,” Mr. Carson said in an email.

The current SEC requirement won’t clear up any confusion regarding so-called advisors prioritizing the “best interests” of their clients. It confuses a public already confused by the many different forms of financial advisors. If you add in insurance salespeople, regulated by a completely different industry and subject to none of the SEC rules, the confusion gets even worse. Even knowing what to ask can be difficult.

We have developed “Ten Questions to ask a Financial Advisor” and recommend you ask these question before working with anyone. The first question is “Do you use a recognized third-party custodian to hold your clients’ assets?” If you choose to let your financial advisor be your custodian, you give up all hope of keeping your assets safe. Alternately you can protect yourself by insisting on a third-party custodian. This avoids working with the dual-registered firms entirely and the problems that regulation “Best Interest” allows.

The last two questions of our “Ten Questions to ask a Financial Advisor” are:

9. Is the fee I pay you the only compensation you receive?

10. Do you sign a fiduciary oath?

A fee-only advisor protects you from hidden commissions, a favorite among dual-registered firms. Don’t be confused by the term “fee-based,” as it is code for compensation coming from both account fees and sales commissions. The CFP Board has determined that the term “fee-based” is misleading. Using the term is now an ethics violation when used to mislead clients into the belief that the advisor’s compensation consists solely or predominantly of fees.

A fiduciary oath is another level of protection. Most of the 72% of financial professionals who can now call themselves “advisor” are still not able to sign a fiduciary oath. Thus, by demanding that your advisor does, you weed out the imposters.

In our 2018 analysis of registered investment advisors in Charlottesville, we found that only a small percentage had the important traits that clients should be looking for.

The best way that you can protect yourself is to restrict your choice of investment advisor to firms associated with the National Association of Personal Financial Advisors (NAPFA). These advisors are all fiduciaries. But they go beyond a legal obligation. They are credentialed as CFP® professionals, a recognized standard of excellence for competent and ethical personal financial planning.

They also strive to provide comprehensive financial planning rather than just investment advice. An important aspect usually overlooked or even ignored by a financial services industry obsessed with commissions.

And they are fee-only. Perhaps the most important factor in firm selection.

So if you are looking for a fee-only fiduciary who provides personal and integrated comprehensive financial planning, either search NAPFA or give us a call.

Photo by Geran de Klerk on Unsplash

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

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.