With the lines between financial advisors and stockbrokers
increasingly blurred, ordinary investors are confused more than ever — and some
advisors aren’t happy about the muddle.
A consortium of financial planners and a prolific industry
commentator are urging the SEC to wash away the confusion, submitting two
petitions aimed at nudging Wall Street’s regulator to issue rules clarifying
just who can call themselves advisors.
Anyone can petition the SEC, whose primary mission includes
protecting investors. While doing so rarely leads to results, it can raise the
profile of a hot-button issue. Law firm Gibson Dunn wrote that under new SEC
chair Gary Gensler, it expects “increased emphasis on the conduct of
institutional market participants,” including investment advisors and
Financial advisors who operate independently of Wall Street
and of independent brokerages are held to tougher standards than brokers when
it comes to protecting clients. With a fiduciary responsibility to always put a
customer’s best financial interests ahead of their own and avoid conflicts of
interests when suggesting investment advice or products, advisors must hew to
the securities industry’s gold standard of investor protection.
At the same time, brokers are increasingly offering
financial advice and wealth management services that step into the turf of
advisors. But brokers aren’t beholden to the stricter standards that advisors
must abide by. Instead, they’re accountable to the lesser “best interest”
standard, known as Reg BI, which says they only have to recommend “suitable”
investments and merely disclose conflicts of interest, not avoid them.
Two related petitions filed Monday with the Securities and
Exchange Commission ask Wall Street’s regulator to draw a brighter line.
Submitted by XY Planning Network, a nationwide consortium of registered
independent advisors (RIAs), and Michael Kitces, a co-founder of the group and
the head of planning strategy at Buckingham Wealth Partners, a $52 billion firm
that’s both an advisor and a broker-dealer, the two documents ask the SEC to
tighten up a 1940 rule and revive a recently stalled one.
One petition asks the SEC to issue rules “modernizing” its
interpretation of a core part of the Investment Advisers Act of 1940, a
landmark law that distinguished between fraudulent stock tipsters and
legitimate financial planners, a then-emerging profession. The 1940 rule says
that only advisors can market themselves as what were then called “investment
counselors.” Brokers cannot.
The phrase “investment counselor” has long since fallen by
the wayside. In its place are monikers like financial planner, financial
advisor, wealth manager and wealth advisor, all used commonly by Wall Street
brokerages. The titles, the petitioners ague, should apply only to those held
to the higher fiduciary standard.
In June 2020, the SEC required brokers and brokerage firms
to stop calling themselves an “advisor.” But it said nothing about similar
terms like “wealth manager” or “financial planner,” and brokers, who are
essentially salespeople, still market themselves as such.
There’s a “continuing convergence of broker-dealers and
investment advisors into this advisory function,” even though brokers aren’t
regulated as advisors, Kitces told a webinar on Sept. 17. He added that anybody
who presents themselves to the public as a financial advisor or offers
financial planning services should be held to the fiduciary standard.
“Don't say you offer financial planning,” he said. “Say
you're a broker.”
The second petition calls for the SEC to revisit a stalled
2007 proposal to restrict brokers from marketing themselves as financial planners,
offering financial planning services or delivering a financial plan.
In 2005, the SEC ruled that brokers could provide fee-based
accounts to customers while not acting as fiduciaries, as long as they made
certain disclosures. Fee-based services involve a client paying a percentage of
her assets under management.
Known as the Merrill Lynch rule, the provision required
brokers who provide financial advice to register as independent advisors. But
it also gave a pass to broker-dealer firms if the advice was “solely
incidental” and disclosed to the client.
A federal appeals court struck down the Merrill Lynch rule
in 2007, meaning that brokers charging fees for managing accounts based on a
percentage of a client’s assets were subject to the higher fiduciary standard.
Brokerages got around the rule by turning themselves and their brokers into
hybrid broker-advisors, avoiding having their brokers subjected to the higher
The SEC responded that year proposing a reinstatement of the
vacated rule, but the proposal has languished.
Kitces, a certified financial planner (CFP), said that the
SEC needs to finalize its proposed reinstatement “to make clear, as Congress
intended” in its 1940 rule, that “brokers can’t call themselves planners.”
In 2019, XY Planning and a coalition of states sued the SEC
seeking to force it to overturn the weaker Reg BI standard, which was approved
in June 2019. The lawsuit argued that the standard gives a deceptive cover to
brokers who provide personalized advice without having to meet the fiduciary
obligations that govern advisors. A federal judge in Manhattan district court
dismissed the claim in October 2019.
Kitces said things get especially blurred when a stock
broker works for a “hybrid” RIA and is registered as both a broker and an
advisor (like his St. Louis-based firm Buckingham Wealth). Some 299,613
individuals are registered as both advisors and brokers, according to the
Financial Industry Regulatory Authority. Meanwhile, 317,936 individuals are
registered as pure brokers. That means 44% of all advisors wear two hats when
dealing with clients. FINRA, which is overseen by the SEC, oversees brokers and
XY Planning said in a statement about the petitions that
“stockbrokers (especially dual registrants) and their firms have actively
marketed their services — including financial planning — no differently from
advisors who operate under a much higher fiduciary standard.” The Bozeman,
Montana-based group, which includes 770 independent advisors, added that the
“broad use of advisor-like titles while continuing to operate a more
conflicted, sales-driven implementation model” only confuses consumers.
It’s a point supported by data. Retirement savers lose at
least $17 billion a year from excess costs associated with conflicted
retirement advice, according to a 2015 study by White House economists. Brokers
and insurers, including Charles Schwab, Raymond James and Morgan Stanley,
create “the belief and expectation on the part of investors that they are
providing fiduciary investment advice rather than non-fiduciary investment
sales,” according to a 2017 Consumer Federation of America report.
“Anyone who uses the title ‘advisor’ or a similar title that
conveys advice should be subject to a fiduciary standard of conduct,” said
Kevin Keller, the chief executive officer of the Certified Financial Planner
Board of Standards. He added that the CFP Board was “currently working on
finding how many CFP certificants are registered as brokers/working at
Asked why XY Planning was now taking another stab at the
broad issue, Kitces cited the pro-consumer stance of Gensler and his recent
appointment of Barbara Roper as his senior advisor. Roper is the former
director of investor protection at the Consumer Federation of America.
Kitces also cited the growing trend of brokers earning CFP
certifications and becoming financial advisors — resulting in consumers falsely
thinking that they’re getting objective financial advice when, instead, they’re
being sold a mutual fund or annuity that throws off commissions for the broker.
Advisors are paid a fee, not a commission for their investment recommendations,
so they don’t have a conflict of interest.
“If you ask anyone off the street what the difference
between an RIA and a broker is, they have no idea,” Kitces told the webinar.
Meanwhile, “the difference between an advisor and a salesperson, anyone can
Click here for the