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The SEC botched title reform. New York got it right

The SEC backed off a promising provision in its proposed rule, while New York takes on use of misleading titles in no uncertain terms

Sep 11, 2019 @ 1:43 pm

By Greg Iacurci

Imagine you want to go skydiving.

Jumping from a plane is a high-risk activity. You, as a novice, seek out professional advice to ensure you use the proper technique. After all, how could you possibly know how and when to deploy a parachute, and to accurately steer to a desired landing spot?

You have the choice of hiring one of two "skydiving advisers" to help guide you safely to the ground. Ostensibly, their business cards and storefronts display the same qualifications — they're both professional advisers. Both of them must be equally qualified, you think.

But these titles mask a simple truth — one "adviser" has over 1,000 hours of jumping experience while the other "adviser" is a parachute salesman. Would this glaring difference be something you'd like to know before jumping from the plane?

This situation parallels the financial-advice industry's problem with titles — whereby brokers and insurance agents selling financial products can call themselves "financial advisers" and deceive the investing public about who they are, what they do and whose interests they represent.

In some ways, saving and investing can, like skydiving, be life-threatening. Sure, maybe not with the same physical immediacy. But the public entrusts advisers with their financial lives — one misplaced investment can wipe out seniors and others of hard-earned savings and take a heavy mental toll on victims.

[Recommended video: Advisers demanding help to improve the client experience]

It's no wonder brokers refer to themselves as "advisers." A recent academic study shows that the public has a higher expectation about the level of service they'll receive from those with advice-oriented titles — such as financial planner, investment adviser, investment consultant and financial counselor — than those with sales-oriented titles such as "stockbroker." The public, according to the study, believes "advisers" look out for them in the same manner as a doctor or lawyer might.

Two recent regulations to overhaul investment-advice standards for financial intermediaries — one issued by New York and the other by the Securities and Exchange Commission — addressed the title-reform issue. But New York got it right and the SEC got it wrong.

The SEC's rule proposal, issued in April 2018, gave a ray of hope to investor advocates that a final rule would address the problem in a clear, meaningful way. The proposal said firms solely registered as broker-dealers and brokers would be prohibited from using marketing with the terms advisory, adviser or advisor, financial adviser/advisor, wealth adviser/advisor and trusted adviser/advisor.

But the final rule, issued in June this year, was a letdown. While the SEC acknowledged that a broker using the adviser label "can have the effect of erroneously conveying" information to investors, it proceeded to use murky, meandering language that lacked transparency and offered ample workarounds to brokers.

"From my perspective, the final rule didn't really go at the title regulation with any teeth," said Derek Tharp, an assistant professor of finance at the University of Southern Maine, who authored the academic paper on titles. "The original proposal at least had something much more substantial from a regulatory standpoint in it."

The SEC does say that broker-dealers' use of the titles "adviser" and "advisor" would "in most instances" conflict with one of the rule's disclosure requirements. However, it notes that it's not "expressly prohibiting the use of these names." It also leaves the door wide open for firms and brokers to exploit other titles to their benefit. Further, dually registered firms can use the titles if they satisfy a disclosure requirement.

That's why the New York best-interest ruleInsurance Regulation 187 — is a breath of fresh air. It uses clear, concise, black-and-white language addressing the root of the problem. The rule says insurance producers "shall not use a title or designation of financial planner, financial adviser or similar title" unless they have the appropriate licenses or certifications and provide non-insurance-related financial services.

Basically, intermediaries only licensed as insurance salesmen can't market themselves as being financial advisers or planners (or any other popular title iteration) who offer clients a comprehensive financial plan.

"New York is taking a broader approach to the use of misleading titles," said Micah Hauptman, financial services counsel at the Consumer Federation of America. "That's a principle we agree with. You can't evade it."

Yes, it's true that New York's regulation only affects insurance products rather than the full spectrum of broker-sold products. But it may offer a template for other states moving forward with their own fiduciary projects, such as Massachusetts, Nevada and New Jersey, and any that plan to propose a formal rule governing securities brokers.

All of this isn't meant to belittle what brokers do. They provide a valuable service to many investors. Many investors would continue to buy brokers' services even if they were required to call themselves brokers rather than advisers. But shouldn't the public know what it's really buying?


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