A disclosure document intended to highlight the differences between investment advisers and brokers instead blurs the line between them and should be fixed by the Securities and Exchange Commission, the Institute for the Fiduciary Standard said Wednesday.
Three SEC commissioners with whom the group met over the summer seem to agree that the client relationship summary – known as Form CRS – that went into force in June 2020 should be reviewed and potentially improved.
On Wednesday, the institute released a study of the Form CRS being given to customers and clients by 29 large financial firms dually registered as advisers and brokers and 12 large fee-only investment advisory firms.
The organization concludes the document diminishes the distinctions in how brokers and advisers are paid and describes their standard of conduct, obligations to customers and clients, and conflicts of interest with identical language. It also said there is a lack of delineation between a broker earning revenue by selling products and receiving third-party payments and an investment adviser providing advice for a fee.
“The disclosures that we see right now from the CRS forms that have been out for more than a year are so terribly deficient [and] they can be improved,” Knut Rostand, president of the Institute for the Fiduciary Standard, said in an online meeting with reporters Wednesday. “Based on looking at these forms, there should be no surprise why they do not do a very good job at all on informing investors how broker-dealers and investment advisers differ. They absolutely stress the similarities.”
Deborah Bosely, founder and principal of The Plain Language Group, criticized Form CRS for its layout — too dense — and its language — too often in the passive voice and full of financial jargon.
SEC Commissioner Hester Peirce indicated Thursday that she supports taking another look at Form CRS.
“Now that Forms CRS have been in use for some time, it makes sense to see whether they are working as intended,” Peirce said in a statement emailed by an aide. “Although firms have worked hard on these forms, the regulations have resulted in disclosure built around a dense, paper-based model, rather than disclosure that embraces newer, more interactive communication methods.”
Two other SEC commissioners with whom Rostad met over the summer — Allison Herren Lee and Caroline Crenshaw — declined to comment on the institute’s study. But aides to the commissioners pointed to statements each made over the last few months supporting investor testing of Form CRS.
The first SEC enforcement case involving the Reg BI rule package centered on fining brokerages and investment advisory firms that failed to deliver Form CRS to clients.
The institute promotes the fiduciary standard, which applies to investment advisers, as providing the most investor protection. The SEC’s broker standard of conduct — Regulation Best Interest — governs brokerages and their registered representatives and was designed to be a higher bar for brokers to meet than the previous suitability standard.
Keeping the two standards separate is a priority for the institute as well as other adviser advocates. Earlier this week, the XY Planning Network, a platform for financial advisers, petitioned the SEC to launch two rulemakings to sharpen the distinctions between brokers and advisers.
The line of demarcation between a broker, who primarily makes sales recommendations, and an adviser, who primarily provides investment advice, is fading in Form CRS, the institute asserts.
It found that the investment adviser disclosure documents disseminated by 17 of the 29 dual registrants did not mention their fiduciary status. Only one of the 11 firms that did mention it suggested that it was a higher standard than Reg BI.
Among the 12 fee-only investment adviser Forms CRS, only two mention their fiduciary status and suggest it is the superior investor-protection standard, the report states.
“I’m concerned that investment advisers are not identifying and describing their fiduciary status,” Rostad said in an interview. “The fiduciary standard differentiates investment advisers from brokers in a meaningful way.”
The purpose of Reg BI was to bring the standards of conduct for brokers and advisers closer together. During the rulemaking, there was a debate about prohibiting the mention of fiduciary status on Form CRS.
Rostad said experts have indicated that restriction is not in place.
“There’s a fair amount of misunderstanding on this point,” he said.
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