Julie Jason: Clarification coming for brokers and advisers

A letter from a reader (A.S.) asked about brokers and advisers:

“I am 87 years old, comfortably retired and read your column every week. I have always done my

own investing by reading and keeping somewhat abreast of financial changes and passing my thoughts on to my broker for support. Now in my old age, I am less comfortable (and my broker has retired) and thinking about getting a financial adviser. I notice that you use the term ‘investment adviser.’ What is the difference between a financial adviser and a ‘fiduciary’?”

Regulators are fully aware that there is confusion on the part of investors as to the differences between financial professionals. That knowledge spurred the U.S. Securities and Exchange Commission to issue new regulations on June 5, 2019, to help investors, the subject of my past two columns. I can’t say that the SEC has made things perfectly clear, however. The regulatory scheme is complex.

As the SEC said in a June 5 interpretive release: “Investment advisers and broker-dealers have different types of relationships with investors, offer different services, and have different compensation models. This variety is important because it presents investors with choices regarding the types of relationships they can have, the services they can receive, and how they can pay for those services.”

So, you have brokers (not fiduciaries) and investment advisers (fiduciaries), but brokers can call themselves advisers. That will no longer be allowed once the new rules go into effect a year from now (June 30, 2020). A broker who uses the title “advisor” or “adviser” will be “in violation of the capacity disclosure requirement” under the Disclosure Obligation of the Best Interest rules.

Here is the rationale, as stated by the SEC in its Regulation Best Interest final rule: “Given that the titles ‘adviser’ and ‘advisor’ are closely related to the statutory term ‘investment adviser,’ their use by broker-dealers can have the effect of erroneously conveying to investors that they are regulated as investment advisers, and have the business model, including the services and fee structures, of an investment adviser.”

However, nothing is as easy as it should be. There is a further complication. Many brokers work for large broker-dealers that are dually registered (as brokers and advisers). Are they advisers or brokers? I’d like to see them called “dually hatted.” According to the Regulation Best Interest final rule, if the broker is “not also a supervised person of an investment adviser” he or she cannot use “adviser” or “advisor” “as part of a name or title.” However, he or she can use the firm’s name if the firm uses “adviser” or “advisor.”

Before the issuance of the new rules, a fiduciary standard of care, the highest under the law, was required of registered investment advisers. That has not changed. “An investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty.” This requires an adviser to “adopt the principal’s goals, objectives, or ends,” quoting the SEC’s interpretation.

Quoting further: “[T]he adviser must, at all times, serve the best interest of its client and not subordinate its client’s interest to its own. In other words, the investment adviser cannot place its own interests ahead of the interests of its client. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the ‘best interest’ of its client at all times.”

The SEC considered increasing the standard of care for a broker to that of fiduciary, but did not.

The standard is currently the lower suitability standard, which will change to a “best interest” standard under the new rules that I discussed in an earlier column.

To get back to A.S.’s question, “financial adviser” is a marketing term and may disappear at some point after brokers are prohibited from using it. You need to really focus on the difference between brokers and investment advisers. You want a broker for investment recommendations. You want an investment adviser for ongoing investment management.

When the regulations go into effect, your investment adviser or broker will provide you with CRS disclosure documents that will help you make distinctions, as we discussed last week. Let me know if you would like a copy of that column. We’ll talk more about this subject. Send me questions and comments.

To read the SEC’s June 5, 2019, interpretation, go to https://www.sec.gov/rules/interp/2019/ia-5248.pdf.

You can find Regulation Best Interest at https://www.sec.gov/rules/final/2019/ 34-86031.pdf.
Final Rule CRS, which describes disclosures, is at https://www.sec.gov/rules/final/2019/34-86032.pdf.

Julie Jason, JD, LLM, a personal portfolio manager (Jackson, Grant of Stamford, Conn.) and author, welcomes your questions/comments (readers@juliejason.com).