Your financial advisor may not actually be an ‘advisor’

Oliver Rossi

Many financial advisors may soon have to start calling themselves something else.

Some financial and wealth advisors will have to ditch the term “advisor” in their marketing, according to a federal rule that takes effect next month.

The rule, known as Regulation Best Interest, and issued by the SEC, aims to reduce investors’ confusion around professionals who help manage their personal finances.

Investor advocates, however, believe the action will be ineffective and further muddy the waters.  

Broker vs. financial advisor

The issue concerns the difference between brokers and financial advisors.

Brokers conduct transactions such as stock trades for their clients. They’re allowed to recommend products that are suitable for an investor and which may also earn them the highest commission.  

Conversely, a financial advisor has a fiduciary responsiblity — a legal duty that requires an advisor to act in a clients best interests — when making investment recommendations.

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Because they’re paid a fee rather than a commission for their investment recommendations, advisors aren’t considered to have the same investment conflicts. Unlike many brokers, advisors provide ongoing monitoring of an account.

However, under current rules, brokers are blurring the lines by calling themselves “advisors.”

This may mislead investors to think they’re getting objective, independent financial advice when a broker may instead be selling a certain product like a mutual fund or annuity, according to investor advocates.

These conflicts are outlined in written disclosures to investors.

Investor confusion

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Yet, more than 40% of investors incorrectly think that both brokers and advisors are required to act in clients’ best interests, according to a joint study conducted by the RAND Corporation and the SEC’s Office of the Investor Advocate.

Starting June 30, the SEC will require brokers and brokerage firms to stop using the term “advisor” in order to “enable a retail customer to more easily identify and understand their relationship.”

The SEC said it wouldn’t delay the rule’s implementation date due to the coronavirus pandemic.

Of course, this isn’t to say brokers are bad. Indeed, there are situations in which using a broker and paying a commission would be more financially advantageous than using an advisor and paying an annual fee — such as the case of an investor who buys a mutual fund and holds it for decades, for example.

Gaps in the rule?

Critics of the SEC rule say it doesn’t go far enough, however.

The measures leaves ample wiggle room for brokers to use similar names in place of “advisor” to foster client trust, they say.

Those include terms like financial consultant, chartered wealth advisor, retirement consultant, wealth manager and retirement counselor, according to a report published by the Consumer Federation of America.

Jay Clayton, Chairman of the U.S. Securities and Exchange Commission, testifies during the Senate Banking, Housing and Urban Affairs Committee hearing on “Oversight of the Securities and Exchange Commission” on Tuesday, Dec. 10, 2019. (Photo By Bill Clark/CQ-Roll Call, Inc via Getty Images)

Bill Clark

The rule also doesn’t apply to individuals and firms that are “dually registered.” They can essentially wear both hats — a broker and fiduciary financial advisor — with the same client and switch between them.

There are 359 dually registered brokerage firms, which hold more than 90 million customer accounts — about 63% of all accounts held by brokerage firms, according to the SEC.

About 60% of the 504,000 registered brokers are at firms that are dually registered, according to SEC data.

“The bulk of the people using the term ‘advisor’ are still likely to be broker-dealer sales representatives and they’ll be free to use the term ‘advisor’ even when they’re acting in a sales capacity,” said Barbara Roper, director of investor protection at the Consumer Federation of America.

The SEC didn’t return a request for comment.

Investors looking for ongoing financial advice from a fiduciary can start by searching in certain networks like the National Association of Personal Financial Advisors, Garrett Planning Network and XY Planning Network, Roper said.

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