Do investors know the difference between a broker and an advisor? No, absolutely not. Why is this important? Because understanding the differences is a critical component of the new SEC advice proposal.
The proposal was published on April 19th and is over 900 pages long. There is a 90- day comment period. The proposal creates a two-tiered standard – one for brokers and one for investment advisors. Brokers will be held to a “best interests” standard that means they can’t place the firm’s or their individual financial interests first. Current regulations require that an investment is “suitable”. The rule does not go on to say the investment advisors will be held to a “fiduciary” standard. The rule seeks comments on potential “enhancements” to the legal obligations of investment advisors.
So will this differentiation clarify the rules so that investors understand the obligations a financial professional may have in regards to their accounts and/or relationship? Not at all.
As part of Spectrem’s monthly research, we ask investors what type of advisor they use. Full Service Broker has consistently been chosen as the advisor type of choice by the largest percentage of investors. In recent years, Financial Planners, Investment Managers and Registered Investment Advisors have increased in popularity but have not overcome the Full Service Broker.
Although investors can click on a definition for an advisor type, we suspect that many investors don’t really know the technical details of the type of advisor they might have. It’s possible that many who use a RIA may actually have a financial planner. Or someone may have a Full Service Broker that includes a financial plan ... it’s just consistent with how murky the names used with various types of advisor has become. The new SEC advisory opinion is trying to address this confusion, however, it may be more difficult than anticipated.
Despite the type of advisor they might be using, investors overwhelmingly believe that their advisor is a fiduciary. The terms “best interests” or “fiduciary” mean nothing to them. Our research shows that investors expect their advisor to be looking out for them all of the time. They expect that their advisor will call them if there is a reason to sell a specific investment. They expect their advisor to research all of their investments and to always look out for the interests of the investor.
In focus group research we often ask investors if they know whether or not their advisor is a fiduciary. The answers we receive are:
“I went to college with him and we’ve been friends ever since. He must be a fiduciary.”
“He’s really nice and seems very knowledgeable. He must be a fiduciary.”
“Of course he is a fiduciary. He’s always calling me.”
So will the new focus on titles make a difference? Yes ... if any advisor remains “just a broker”. Why would you want to be a broker but explain that you aren’t really an “advisor”? Will investors care? Will they ask for discounted fees?
Unfortunately, the terminology in the industry has become very cloudy. Because of this lack of clarity, the government is getting involved. In most cases, I support less government regulation rather than more. But clarifying this industry and the responsibilities of an advisor would be helpful. But at the same time, investors don’t understand this terminology today and this may not clarify it for them in the future. Maybe advisors should always be fiduciaries? Maybe not? The new proposal begins to address some of the confusion but falls short of really solving the problem.
Regardless of what happens in the future, investors need to be educated and to have a greater understanding of the advisor/investor relationship. The more that advisors can be held to a standard of care that protects the investor, the better the outcome.
© 2018 Spectrem Group