"Can a registered rep and investment advisor rep wear two hats at one time? Can they remove the fiduciary hat once it's assumed?" asked Thomas Orecchio, NAPFA's chairman and a longtime advisor based in New Jersey. "Under the current situation, the answer is yes. But the consumer doesn't know when you're behaving as an advisor or rep. We believe the advisor can't take off the advisor hat once it is put on. We think that your fiduciary responsibilities refer to the relationship you create with a client, not any one account or transaction."
But the Securities and Exchange Commission (SEC) doesn't agree, saying that reps are investment advisors "solely with respect to certain accounts." In fact, the NAPFA press conference was held as the SEC advances a controversial proposal pundits say is an end-run around the agency's loss on the same issue in federal court earlier this year. The SEC lost its push to carve broad exemptions for brokers who were offering "advisory" accounts without registering as advisors.
Now the SEC is attempting to create "special rules" that would once again give brokers exemptions, provided they do not exert discretion over accounts or charge separately for advice. The SEC makes clear, brokers won't have to register as advisors just because their firm offers full-priced and discount brokerage accounts and fee schedules. At the same time the agency is attempting to clarify limited responsibility for those brokers who do register as investment advisor reps, saying, "A registered broker-dealer is an investment advisor solely with respect to certain accounts." Both NAPFA and the Financial Planning Association (FPA) filed letters in November criticizing the SEC's attempted carve outs for brokers.
To illustrate the harm NAPFA believes dually registered advisors can do, the group handed out a narrative story about "Bud," the dual registrant, and "Mrs. Grant," who hires him for a financial plan. In the NAPFA story, Bud prepares Mrs. Grant's plan, but then takes off his advisor hat to sell her a variable annuity and some of his firm's proprietary funds. "How does this fit in with my plan? Are you still my financial advisor?" Mrs. Grant asks. To which Bud replies: "This fits in just fine. Just trust me. I'll take care of you."
"The bottom line is that we're looking for the fiduciary rule to be applied throughout a relationship with a customer, not be taken on and off like a hat," said Diahann W. Lassus, chair of NAPFA's Industry Issues Committee and a veteran advisor in New Jersey. Without fiduciary standards, brokers don't have to put clients' interests first, disclose conflicts of interest or charge reasonable fees, NAPFA officials say. "It's fair to assume as much as 40% of total returns offered by the capital market are being consumed by brokers and other financial intermediaries," Lassus says.