When brokerages and wealth management firms began sending their retail customers a new type of regulator-mandated disclosure last year, it was supposed to erase investors’ confusion about how their financial advisors make money.
Instead, the required forms have made it even harder for ordinary investors to understand the fees they pay, as well as a firm’s misconduct and conflicts of interest, according to a new
The Securities and Exchange Commission intended for its client relationship summary form, or
But counter to its SEC-mandated purpose — and despite consisting of just a few pages — the form further blurs the distinction between a broker, who doesn’t have a fiduciary duty to the client, and a registered investment advisor, who does, said Knut Rostad, the institute’s president and co-founder.
Language in the form’s section regarding standards of conduct and conflicts of interest “are identical” for brokerages and advisors, Rostad wrote.
The forms run only four pages (for firms that are both brokerages and advisory firms) and two pages (for independent advisory firms), but they “obscure and mislead retail investors, experts and investment professionals as to how broker-dealers and investment advisers differ,” he
Rostad called on the SEC, now
Whose ‘best interest?’
Brokers are paid commissions to sell securities and insurance from large financial institutions. Conversely, independent advisors earn fees — and nothing more — for their services and can’t charge a commission for selling particular stocks or insurance policies. The CRS form has been required since June 2020 for every brokerage, hybrid brokerage-advisory firm and registered investment advisory firm, or RIA.
Doug Elstun catered to NBA and NFL sports stars, many of whom may not have known about his confidential client settlements outside of FINRA.
The forms came about in connection with a 2020 SEC rule known as Regulation Best Interest, in which brokers are required only to recommend products and services deemed “suitable” for a client. Confusingly, given its name, Reg BI is a less-strict standard than the rule for independent advisors, whose fiduciary standard requires that a client’s best interests always come first and that conflicts be not only disclosed but also avoided.
Stephen Hall, the legal director and securities specialist at Better Markets, a nonprofit consumer advocacy organization, said that “The SEC never subjected the Form to proper testing to ensure it would actually clear up the massive confusion surrounding the different standards that apply to broker advisers and investment advisors.”
‘Plain English is required’
Fiduciary experts complain that the form
Much of the investing public’s confusion stems from a decades-long push by brokerages to cast themselves as “financial planners” and “wealth advisors.” The latter should, in theory, be held to the higher fiduciary standard, not the lesser best-interest standard for brokers. Rostad’s paper comes as other industry participants urge the SEC and the self-regulatory Financial Industry Regulatory Authority to
FINRA and its overseer, the SEC, say they’re serious about forcing firms to file the document. In July,
When it comes to filling out the CRS, firms self-report their details. That’s a problem.
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Blame the industry, not the consumer
Surprisingly, Rostad found that Wall Street, independent brokerages and independent advisors are equal opportunity obfuscators.
For example, he wrote,
Of 29 large wirehouses and brokerages that are also registered as investment advisors with a fiduciary standard, not one firm discloses on its form the fact that it has what Rostad called “a duty of loyalty and care” to issuers of stock that it sells to customers.
Meanwhile, out of 12 large RIAs with assets under management from $5 billion to $30 billion, five made no mention of their fiduciary requirements on their most recent CRS.
While his paper didn’t name the five advisory firms, Rostad said in a brief interview that they were Atlanta-based Homrich Berg, Los Angeles-based Lido Advisors, Los Angeles-based Churchill Management Group, Adviser Investments in Newton, Massachusetts, and Mather Group in Chicago.
Instead of distinguishing between brokers and advisors, the CRS forms “create an aura of similarity” between the two, Rostad said. While investors are routinely blamed for not knowing the difference, the problem is really one of “information confusion and omission” by the industry, he wrote. Industry marketing materials and regulatory disclosures “have communicated either that there are no differences or that the differences are minimal.”
