Calling a broker an adviser is dangerous, and it’s time to embrace the black-and-white distinction

Kudos to InvestmentNews! Fiduciary September comes to a close this week, and one of the central themes has been the vital importance of clearly separating sales from advice in law, practice and the minds of investors. A September 28 InvestmentNews editorial makes this point very well. The editorial calls on regulators to “embrace the black–and—white distinction” between brokers and advisers. In so doing, the editorial flatly rejects the SIFMA (Securities Industry Financial Markets Association) argument to simply ‘overlay’ suitability rules with a fiduciary gloss noting, “How can a broker ultimately serve two masters, the company and the client? One must win out and there is a conflict.” InvestmentNews concludes, “Calling a broker an adviser is dangerous. Its time to embrace the black—and—white distinction rather than trying to shove everyone into gray box.” Kudos to InvestmentNews!

Published in Investment News on September 28, 2014

Merill Lynch’s recent termination of a team of top advisers because of allegations they had recommended that clients invest outside the firm raises issues other than “selling away.” Reporter Mason Braswell noted that selling securities without permission or processing them outside of a brokerage’s platform violates firm policy and Financial Industry Reg- ulatory Authority Inc. rules.

But a bigger matter remains: If recommending that clients buy off a platform is in their best interest, but doing so is forbidden, an adviser in this situation cannot possibly act in a fiduciary capacity.

The question of whether all advisers should be held to a fiduciary standard becomes meaningless. They can’t when the broker-dealer’s interests bump up against the client’s.

That, in turn, brings up a timely point. The Securities and Exchange Commission is considering whether to put all brokers and advisers under the same fiduciary standard, requiring that anyone offering retail investment advice work in the best interests of clients. Brokers currently are required to do only what is suitable for clients, and their loyalties ultimately lie with their company.

In objecting to a uniform fiduciary standard, some brokerages, insurers and advocacy groups have stressed that their business structure simply doesn’t align with a straight fiduciary relationship and have asked for exceptions to always acting in a client’s best interest.

How can a broker ultimately serve two masters, the company and the client? One must win out when there’s a conflict. The fact is that brokers don’t have to choose. It’s when they call themselves advisers that things get tricky.

The SEC’s directive is clear.

As Blaine F. Aikin explains in this issue’s Fiduciary Corner column: “An often-overlooked fact is that anyone (even a broker) who provides personalized investment advice to investors is already subject to a fiduciary standard. This fact is generally ignored due to the SEC’s failure to enforce the requirement established under the Investment Advisers Act of 1940.”

DISCLOSURE

The only exemption is when the broker is providing an arm’s-length transaction and all parties involved know that.

If financial professionals present themselves as advisers when it’s convenient to do so — on business cards and in marketing — but then don’t uphold the position’s fiduciary responsibility, the distinction is muddled and everyone loses.

So what’s the alternative?

It’s one thing to say that brokers acting in an advisory capacity should be fiduciaries and another to ask if they can accomplish that.

The fiduciary duty issue has gone nowhere in the nearly four years since the SEC originally had to report on the differences between adviser and broker oversight. A new way forward is called for.

The only solution is to call a spade a spade or, in this case, a broker a broker. There is room for brokers and advisers in this industry; both serve worthwhile functions.

But individuals and firms must be held accountable for the titles they use. A person providing advice not incidental to selling securities is an adviser and must act as a fiduciary. If the advice is ancillary to the sale of securities, that person is a broker.

TWO SENTENCES

A two-sentence disclosure at the beginning of a relationship (and accurate representation in marketing) would tell clients what they need to know and keep everything aboveboard: “I’m a broker, and my primary obligation is to my firm. I’ll do the best I can for you within that structure.”

Where do dual registrants fit? When do they exchange one hat for the other?

Having donned the adviser hat in establishing a trust relationship with the client, it cannot be removed during transactional activity. The moniker — and its requirement to act as a fiduciary — must stand in all engagements with the client. Broker-dealers also must abide by this and let advisers act accordingly.

All parties would benefit from a stark distinction, a line in the sand. If advisers are working in a fiduciary capacity, no gray areas of loyalty exist — they must act in clients’ best interest and not be reprimanded by firms for doing so.

Clients also would be better off, as firms could no longer imply a trust relationship where one doesn’t legally exist.

Calling a broker an adviser is dangerous. It’s time to embrace the black-and- white distinction rather than trying to shove everyone into one gray box.