The financial services industry has long recognized a distinction between advisors who collect fees for managing assets and brokers who charge commissions for carrying out securities transactions.
Still, firms and trade groups alike are speaking out against
Advisors registered at the state level are held to the fiduciary obligation to always do what's best for their customers. Brokers, by contrast, are under a slightly weaker standard known as Regulation Best Interest, requiring them to look out for their clients' best interests while also disclosing conflicts.
NASAA, which represents state and provincial regulators, thinks regular investors often struggle to discern which type of financial professional they are working with. A NASAA project group dealing with regulation for brokerages
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Support from XYPN, FPA and PIABA
The proposal won plaudits
But they believe that "such standards are only effective when there are clear 'truth-in-advertising' protocols that prohibit salespeople from using advice-like titles such as 'financial advisor' when not actually acting in the capacity of an investment adviser."
Adam Gana, the president of the Public Investors Advocate Bar Association,
Pushback from broker-dealers
The only trouble from many brokerages' perspective, according to various submitted comments, is that the proposed prohibition doesn't line up with existing federal regulations. If states were to adopt their own individual bans on brokers designating themselves "advisors" or "advisers," the result could be a bewildering regulatory patchwork, argued Mark Quinn, the director of regulatory affairs at Cetera Financial Group,
Quinn noted that Reg BI contains no explicit ban on the use of the words "advisor" or "adviser" by people who are working strictly in the capacity of a broker.
Instead, the Securities and Exchange Commission has released interpretations since its adoption of Reg BI in 2019 saying that all wealth management professionals have an obligation to disclose accurate descriptions of their business relationships with clients. The SEC has issued guidance that brokers generally should not call themselves advisors when dealing with retail investors.
But there are notable exceptions. For instance, many brokers are registered at both the state and federal levels as financial advisors. The Financial Industry Regulatory Authority, the broker-dealer industry's self-regulator, reported in its data-crunching industry snapshot that more than half — 319,597 — of the 628,392 representatives of brokerage firms in 2024 were so-called dual registrants.
The SEC also allows brokers to use the "advisor" title when they're performing special functions not involving retail investors, such as acting as municipal advisors or commodity trading advisors. Quinn of Cetera wrote that states would do better to follow the SEC's lead rather than adopt a blanket ban.
But there are signs of weakness in the SEC requirement that wealth managers disclose to clients whether they're acting as advisors or brokers at any given moment. In a sweep looking at 500 firms' compliance with Reg BI, NASAA found that 7% still did not have policies prohibiting representatives working strictly in a broker capacity from holding themselves out as advisors.
That figure was down from 17% in 2018. Yet, according to the letter from the XY Planning Network and the Financial Planning Association, it also "highlights how title infractions remain among 7% of those not permitted to use them in such a manner, despite Regulation Best Interest's approach of overseeing titles through the disclosure capacity requirements alone."
Quinn warned NASAA's proposal could also run afoul of the federal National Securities Market Improvement Act, which prevents states securities regulators from adopting recordkeeping requirements that are stricter than the federal government's. Brokers in states that might adopt the proposed ban, Quinn said, would have to take care never to refer to themselves as advisors in their communications with investors.
"Broker-dealers would be required to make and keep a record of all such communications, which would necessarily differ from the records they are required to keep under Reg. BI," Quinn wrote.
NASAA's 'model rule' and industry concerns
The proposed ban on the use of the advisor title by brokers comes
NASAA at that time argued that it was merely trying to give states a way to incorporate Reg BI into their own regulatory frameworks. But industry groups pushed back with complaints that the initial proposal went far beyond the requirements of federal conduct standards for broker-dealers.
Opponents worried that the proposal could make
Despite the revisions, broker-dealers and industry groups are still not entirely happy. Quinn noted that one section in the NASAA proposal would make Reg BI's requirements apply to any sort of recommendation made by a broker, not just those meant for retail investors. The federal Reg BI standard, by contrast, falls almost exclusively on brokers' dealings with individual clients. Quinn and other brokerage industry representatives called on NASAA to adhere more closely to the federal language.
The NASAA proposal, if formally adopted, would not impose a new conduct standard in all 50 states. Instead, it would merely put forward a "model rule" that state regulators would be free to adopt, modify or ignore as they see fit.
Althea Brown, chief legal officer for the independent broker-dealer giant LPL Financial, noted in
She urged NASAA to recommend other states do the same. Brown wrote that having a single standard "provides predictability and consistency, so that retail investors can clearly understand the ways in which they interact with a financial professional regardless of their geographic location."
"In that spirit," she added, "there are several instances where the proposal's language should be updated to achieve better alignment with Reg BI."
