“What’s in a name?” Juliet asked. The famed line from Shakespeare’s Romeo and Juliet might have been on to something.
Is a name just a name with no actual meaning, or is it an indicative of whom and what an individual is?
This is exactly what the SEC is trying to determine about the title “adviser” and it’s been a heated debate among industry professionals – fiduciary vs. Non-fiduciary.
A Brief History Of The Term
Names and titles change constantly as the industry and public perception changes.
Adviser is first referenced in the Investment Advisers Act of 1940. The Investment Advisers Act uses three criteria to determine who is and isn’t an adviser including how they are compensated and what kind of advice is being offered to clients.
Those guidelines read as follows:
“(1) their advice, counsel, publications, writings, analyses, and reports are furnished and distributed, and their contracts, subscription agreements, and other arrangements with clients are negotiated and performed, by the use of the mails and means and instrumentalities of interstate commerce;
(2) their advice, counsel, publications, writings, analyses, and reports customarily relate to the purchase and sale of securities traded on national securities exchanges and in interstate over-the-counter markets, securities issued by companies engaged in business in interstate commerce, and securities issued by national banks and member banks of the Federal Reserve System; and
(3) The foregoing transactions occur in such volume as substantially to affect interstate commerce, national securities exchanges, and other securities markets, the national banking system and the national economy.”
In short, the act asserts that anyone providing advice or making recommendation on securities is in fact, an investment adviser. The act establishes that advisers (note the “er”) must act as fiduciaries for the advice they share as clients.
It’s also worth noting that Investment advisers are the only financial services professionals that are legally allowed to call themselves “advisers.”
This is where the “or” comes in.
The act that carved out these guidelines 78 years ago remains with an exemption. Brokers are not advisers as defined, and therefore not under held to the RIA standard that was established in the act.
Unsurprisingly, brokers, insurance agents and financial advisors not dealing in securities saw an opportunity to reach investors who didn’t want to hear a sales pitch, calling themselves “advisors” instead.
Unfortunately over the passing decades, unknowing investors who didn’t recognize the difference in spelling between adviser/advisor took up their advice. Many investors also didn’t know that these advisors were not held to the same fiduciary standard thanks to a legal loophole.
Is There A Problem?
Despite the definition in the Investment Advisers Act of 1940, there still seems to be a disagreement as to whether or not the title and its two spellings are an issue.
“Legally, there is no difference between the two terms,” said Glenn Moore, financial adviser at Gibraltar Financial. “If you are a RIA providing investment advice for a fee, it doesn’t matter if you call yourself and adviser or advisor.
Moore notes that in formal documents and legal matters his firm uses the “E-R” version, but that it doesn’t affect them in anyway.
“There really is no difference to us,” he said, “but I prefer the more traditional spelling.”
Meanwhile other industry professionals take the matter very seriously.
Jon L. Ten Haagen, a Certified Financial Planner from Huntington, N.Y. said, “The real difference between them is critical to an investor’s bottom line. I work too hard to be a CFP and to be lumped in with the others is an insult.”
Is There A Solution?
In its three-fold proposal, the SEC is considering limiting the usage of the term “adviser” whether it’s spelled with an ER or an OR. Brokers and insurance agents would be barred from using the word in their title in any variation, but hybrid broker-dealers would not be affected.
The SEC says that this in an effort to “enhance investor protection and to preserve the investor’s access to choice.”
NAIFA says the title reform makes the choice even more confusing for consumers.
“It’s confusing that the SEC is proposing to limit the term financial advisor as opposed to investment adviser,” said Judi Carsrud, assistant vice president of government relations at NAIFA. “I think everybody understands that the term investment adviser is specific to the 40s act, but because there are lots of financial advisors that don’t have anything to do with securities, we think it will cause more confusion – not less – to consumers to limit one segment of financial advisors.”
NAIFA objects to the title reform proposal, but offers a compromise to the SEC it says would benefit both sides.
Gary Sanders, counsel and vice president of NAIFA said, “We would like to see that the proposed restrictions on either spelling deleted from the proposal.”
Carsrud said NAIFA “fully supports a best interest standard.”
Sanders says the reason for their full support of a best interest standard is because NAIFA members have long-term, sometimes even multi-generation clients, acting within the realm of a fiduciary.
“They’re not transaction based,” he said. “If they aren’t acting in their client’s best interest, they’re not going to be in the business for very long.”
AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.