The majority of those working in the financial services industry are aware of the report last year by the Securities and Exchange Commission that found that 76% of Main Street investors surveyed did not know the difference between a representative of a broker-dealer and a registered investment adviser. The SEC is now struggling with ways to bring into line regulation of the two decidedly different approaches to financial services and, more important, to provide increased public safeguards.
Perhaps the primary reason for the failure of the public to recognize the difference between the two is due to the broker-dealers' use of the term “financial adviser.”
In reality, a broker-dealer rep is a sales rep, not an adviser. The broker-dealer rep does not get paid to give advice and is not licensed to provide advice, and hence is not an “adviser.” Such reps get paid when they sell a product; thus they are salespeople.
It seems clear that when broker-dealers refer to their salespeople as “financial advisers” or “financial counselors” or “financial consultants,” their intent is to mislead the public as to the true purpose of their reps. No wonder the public is confused. It seems pretty clear that the public would be less confused if the B-D rep's title were “financial services sales representative” or “vice president of sales.”
With this same approach, other industries could use titles such as “used-car adviser,” “carpet counselor” or “door-to-door consultant.” These are of course all salespeople, and the public recognizes them as such. Most people see warning lights in their minds when they deal with salespeople. It is an instinctive self-defense mechanism to be skeptical of what the salesperson is saying, to shop around with other vendors and to get second opinions.
However, when salespeople are called — and viewed as — “advisers,” the public can be led into thinking they are being told what is best for them. In fact, in a commission-driven transaction (with only the suitability rules in play), the client often comes out on the short end of the “conflict of interest” stick.
The public's understanding of the difference between B-D reps and RIAs is further confused when large B-Ds are also registered as RIAs and the B-D reps are registered both ways. With this dual registration, how are clients ever to know if the representative is wearing the RIA hat and giving advice or the B-D hat and selling a product?
This dual registration is how a rep sells a variable annuity, then puts an RIA money management contract on top of the VA and collects half of the continuing 1.5% RIA fee, in addition to his or her upfront commission. Clearly, this dual registration and income stream is not in the client's best interests.
The public would indeed benefit from a better understanding of the differences between a broker-dealer rep and a registered investment adviser. If the SEC wanted to improve the public safeguards and to improve the public's awareness as to the differences between the two modes of services, the easiest and cheapest way would be to start calling a spade is a spade. The SEC could simply mandate that “a salesperson is a salesperson” and “an adviser is an adviser,” and stop the financial services industry from referring to salespeople as advisers, consultants or counselors, etc.
ONE OR THE OTHER
The second part of such a “spade rule” would state that the financial services professional is either a B-D rep who sells products or an RIA, but no one can be both. It is no different than a physician and a pharmacist. One is trained to diagnose and prescribes, and the other sells a product. Financial services should have the same safeguards against conflicts of interest that exist in health care.
In reality, the chances of the SEC's developing a spade rule are slim to none. It will never happen as a way for the public to differentiate between the B-D rep and RIA, because it is such a simple solution and is an approach that the B-Ds would fight tooth and nail.
Michael Chamberlain, a certified financial planner, is the principal of Chamberlain Financial Planning LLC.