Financial advisors are voicing strong support for a proposed state-level rule that would restrict certain professionals in wealth management from adopting the "advisor" title.
But their counterparts in the brokerage world are warning about possible conflicts with federal law and a resulting regulatory patchwork that could leave the investing public more befuddled than enlightened. Members of the North American Securities Administrators Association, which represents state and provincial regulators, on Monday approved changes to its model rule on
The amendments, which U.S. states and Canadian provinces can now adopt, would explicitly ban registered representatives of broker-dealers from holding themselves out to the public as "advisors" or "advisers." The changes also allow state and provincial regulators to adopt conduct standards similar to the federal "
Advisors concerned about client confusion — brokers, too
Financial advisors of various stripes say a ban on the use of the "advisor" title by broker-dealers has long been needed. Marianela Collado, a senior wealth advisor at Plantation, Florida-based Tobias Financial Advisors, likes to explain her opposition to allowing brokers to call themselves advisors by making an analogy to the medical field. It's almost as if pharmacists could call themselves doctors, she said.
"The consumer would be very confused and could be seriously harmed if they thought they were seeing a doctor for a medical evaluation but instead went directly to a pharmacist to get prescriptions for issues nobody has really diagnosed and evaluated," Collado said.
READ MORE:
Much of the difference between brokers and advisors comes down to the ways they make money.
Registered investment advisors like Collado's Tobias Financial Advisors strictly rely on fees charged as a percentage of the assets they have under management ($900 million, in her firm's case.) Broker-dealers instead often make money from commissions they earn from putting investors' money into specific investments.
The different models give rise to different conduct standards for the two types of wealth managers. Advisors have a fiduciary duty to always put their clients first and eliminate conflicts of interest. Brokers have more leeway merely to disclose their conflicts — such as their ability to make commissions by recommending certain investments.
Gregory Furer, the founder and CEO of Pittsburgh-based Beratung Advisors, said the NASAA model rule is a good step toward "truth in advertising."
"Brokers are salespeople," Furer said. "That doesn't make them bad — but calling themselves 'advisors' blurs the line between advice and sales. And that confusion hurts consumers."
But
The SEC exception
The Securities and Exchange Commission also specifically allows brokers to call themselves advisors when they're performing certain functions not involving retail investors. The SEC exception applies to brokerage representatives who are acting as municipal advisors or commodity trading advisors.
Brokerage firms have also complained NASAA's model rule goes beyond the federal Reg BI conduct standard in other ways. Reg BI, firms noted in comment letters, applies almost exclusively to brokers' deals with retail investors; NASAA's model instead extends to almost any type of recommendation.
But Mark Quinn, the director of regulatory affairs at the independent broker-dealer Cetera Financial Group, gave NASAA credit for modifying its rule in response to industry concerns. The original version, as first proposed
"That was 10 miles apart, and now it's more like 10 feet," Quinn said. "This is something we can live with."
Quinn said he thinks most states will eventually adopt NASAA's model rule.
"This is not really controversial," he said. "Every state has its own rhythm. So it could take six months or it could six years. But most states will probably get around to it."
In the end, compliance will come down to disclosure, much as it does now, he said. Firms will have to be careful to make clear to investors when their representatives are working in an advisory capacity and when they are operating on the brokerage side of the business.
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."
'Title protection' for advisors long sought by industry groups
NASAA's model rule meanwhile marks a step toward a goal long pursued by industry groups like the XY Planning Network and the Financial Planning Association. Both organizations have pushed for
The Public Investors Advocate Bar Association, an organization of lawyers representing aggrieved investors, similarly expressed support for NASAA's model rule.
"PIABA has long believed it is a dishonest and unethical business practice for financial professionals to use a purported credential or professional designation that misleadingly indicates or implies that such a person has a special expertise, certification, or training," PIABA president Adam Gana wrote in a letter dated Dec. 19.
Of course, nothing guarantees there won't be ways around the proposed restrictions on the advisor title. John "Dick" Power, the principal of the Walpole, Massachusetts-based firm Power Plans, said he generally supports NASAA's model rule. But he does see one easy workaround for brokers.
"The problem is they will simply use another term with similar cachet, e.g., 'wealth manager,'" Power said. "But I would like them to be excluded from using 'advisor' or 'adviser.'"
