NEW SEC RULE REQUIRES BROKERS TO STOP CALLING THEMSELVES “ADVISORS”

By: Courtney Werning, Esq.

Long have stockbrokers referred to themselves as “financial advisors” or “wealth advisors.” Until now, regulators have allowed it. Next month, the rules change.

“Brokers” conduct investment transactions for their clients. Under the current rules, they are allowed to recommend products that are suitable for an investor but which may also earn them the highest commission.

Conversely, an investment adviser has a fiduciary responsibility — a legal duty that requires an advisor to act in a client’s best interests — when making investment recommendations. Because investment advisers are not paid by commissions for their investment recommendations (they are paid fees for their investment advice), advisers are considered to have no conflicts of interest with their clients.

In the past, brokers have been allowed to use the term “advisor” in their titles. This gives the potential for brokers to mislead investors into thinking they are getting a fiduciary standard when they actually are not. According to a recent study, more than 40 percent of investors incorrectly think that both brokers and advisers are held to a fiduciary standard and are required to act in clients’ best interests.

A new rule issued by the Securities and Exchange Commission going into effect on June 30, 2020, will prohibit brokers who are not also investment advisers from referring to themselves as “advisors.”

There are still countless terms brokers can and do use that blur the lines and suggest fiduciary standards where there is none: financial consultant, chartered wealth advisor, retirement consultant, wealth manager, and retirement counselor – just to name a few.

The rule also does not apply to individuals that are dually-registered as both a broker and an investment adviser. Those individuals can essentially wear both hats – a broker and fiduciary financial adviser – with the same client. When the professional switches from his or her fiduciary hat to the lesser standard of suitability and sales, the vast majority of the time the client has no idea.