Should the SEC regulate the ‘advisor’ title?

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Fee-only advisors often struggle to impress upon investors the fundamental differences between their fiduciary business model and that of, say, a commission-drive brokerage shop operating under the suitability standard.

But what if regulators stepped in to help clear things up?

Advocates for stronger fiduciary protections are hoping that the SEC will do just that, arguing that any financial professional who self-identifies as an advisor of any stripe should be held to the legally binding regulations laid out under the Investment Advisers Act of 1940.

“If you call yourself an advisor, whether it’s a financial advisor with an ‘o’ or an investment adviser with an ‘e,’ or provide investment advice as a fundamental part of your business, then you should have to register as an investment advisor and operate under the legal and regulatory interpretations of the Advisers Act,” says James Allen, who heads up capital markets policy for the Americas at the CFA Institute.

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That means operating under a fiduciary standard. “If you don’t wish to be bound by a fiduciary standard of care, that’s fine, but don’t call yourself an advisor of any sort,” says Allen, who participated in a TD Ameritrade webinar on a potential rulemaking on titles for financial professionals. “And if you’re in the securities brokerage side, make sure that you point out prominently that you’re engaged in brokerage sales.”

On the SEC’s radar
In response to a request for comment, an SEC spokeswoman referred to statements made this spring by Chairman Jay Clayton, shortly after taking the reins at the commission, when he asked for public input on how to address the regulatory gaps between advisors and broker-dealers who serve retail investors.
Clayton noted the SEC’s long-running consideration of the issue, and posed a series of questions that could inform a potential rulemaking, including one relevant to the issue of titles: “What disclosures, advertising, or other information do investment advisers and broker-dealers provide to retail investors currently, and how do those contribute to or mitigate any investor confusion?”

For former SEC Commissioner Luis Aguilar, those remarks came as a hopeful sign that the Clayton will take a hard look at the discrepancies between advisor and broker-dealer regulation.

“There’s a lot of issues the SEC has, a lot of things that take the attention of the chairman, and I find it noteworthy that in Chairman Clayton’s first-ever public speech in which he was trying to send some messages — and he had a thousand things to speak about — he chose to speak about the fiduciary standards as one of them,” Aguilar says. “So that tells me that it’s clearly on his radar screen, because he didn’t have to mention it. He could have talked about other things.”

Backers of regulations governing the use of titles contend that such a rule would fit into the SEC’s oversight of registrants’ advertising activities, which include prohibitions against advisors using client testimonials and touting successful past investment recommendations.

Aguilar argues that bright-line rules governing titles and fiduciary obligations are necessary to iron out what he calls a “two-tier market” in investment advice that is largely unknown to retail investors.

“The problem is when you cannot distinguish one advisor from another, yet one is a fiduciary acting in the client’s best interest and the other is not,” Aguilar says. “There is confusion, and multiple studies have shown that individuals cannot distinguish one type of advisor from the other.”

Adds Aguilar, “I do not believe that we need to delay in having broker-dealers being regulated as fiduciaries whenever they are providing personalized investment advice. Investors already believe their interest is being put first when they receive investment advice. I believe the SEC should make that a reality.”


Brian Hamburger, president and CEO of the advisor consultancy MarketCounsel, similarly favors a rulemaking to put meaning behind the title of advisor, but he is skeptical about its prospects, noting that the distinctions between brokers and advisors, while of huge importance within the industry, remain arcane to most consumers.

“Investors have historically been very apathetic about really entrenching themselves with regards to the distinction between advisors and brokers, and so long as that’s the case, it’s going to be tough to imagine the SEC immediately changing tack given the issues that are backlogged on its docket today,” Hamburger says.

Now that the SEC’s consideration of fiduciary responsibilities is intertwined with the Department of Labor’s own fiduciary initiative, an already contentious issue has taken on an added complexity. While Aguilar would like the SEC to consider a uniform fiduciary standard together with the issue of advisor titles, he sees the potential to address investor harm in a narrower rulemaking focused only on titles.

“If that’s not possible,” he says of a uniform fiduciary standard, “then a properly worded, carefully worded rule that says that if you use any of these titles that have either the word ‘advisor’ or a similar word that connotes that you are not a salesperson, but rather someone who is giving a service to the client in terms of helping them think through what they should buy and sell — then if you properly do that, it may be that you bring everybody into the same standard without having to necessarily address the uniform fiduciary standard rule separately.”

The aim would be to draw a bright-line distinction between best-interest fiduciaries and other financial professionals, and to prevent brokers from doing what Aguilar calls an “end run” around fiduciary regulation and its attendant disclosure obligations. Likewise, advocates envision that such a rule would apply fully to dually registered brokers and advisers, codifying fiduciary status as a full-time requirement.

“I think the idea here is that once you’re an advisor you’re always an advisor, especially for that client,” Allen says. “Once you cross that line, that Rubicon, to start advising — giving personalized investment advice — you can’t really go back over and say, ‘Okay, well, no, I’m back to being a commissioned salesperson.’”

Or, as Aguilar puts it, “The fact is that you cannot be three-fourths a fiduciary. You either are one or you’re not.”

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Fiduciary Rule Fiduciary standard RIAs Fee disclosures Independent BDs Jay Clayton Brian Hamburger Luis Aguilar SEC DoL