A Simple Proposal
A better approach is to give up on the idea of a uniform standard that harmonizes advisor and broker business models. Let’s recognize that the needs and practices of brokers are different from those of fiduciary advisors. Stop trying to fit the broker peg into the fiduciary hole.
Instead, let’s start by addressing the problem everyone agrees exists: the public is confused. Eliminate the confusion by requiring truth-in-labeling. Require brokers to call themselves “brokers” or some other acceptable term. Require fiduciary advisors to call themselves “advisors” or some other acceptable term. The specific designations don’t matter as long as they are different from each other. Call a spade, a spade.
Then educate the public about the duties performed by, and the standards applicable to, both groups. This would involve both simple point-of-sale disclosures and a more extensive public awareness campaign. Let the public decide which business model is right for their needs.
If brokerage firms want to enter the advice business, they should be welcome to do so. But they would need to register under the Advisers Act and be subject to its fiduciary standard. This will maintain the protections currently available to investors under the Advisers Act, while ensuring a level playing field or all professionals who give advice.
Brokerage firms may need to create separate business units to provide brokerage and advisory services. That is a small price to pay to maintain current investor protections and promote regulatory fairness. The brokerage units could continue all the practices that are subject to a suitability standard. Their advisory units could provide fee-based advice subject to a true fiduciary standard.
This would restore the balance created by Congress when it enacted the Advisers Act in 1940. Product sales would be clearly delineated and regulated separately from advice. The public would have a clear understanding of their choices and could make informed decisions.
SIFMA argues that the nature of the advice typically provided by brokers is different from that provided by advisors and so the standards applicable to each should be different. They say brokers provide non-discretionary advice on a periodic basis, while advisors provide discretionary advice on an ongoing basis. Even if this were true, it is a distinction without a difference. Advice is advice to those who rely on it. Investors seeking advice should be able to count on the fact that those offering it put the investor’s interests before their own.
Harmonization is a trap. It is not possible to create a standard of conduct that maintains the stringency of the Advisers Act fiduciary standard, while allowing brokers to continue their traditional business practices. Clients will suffer if we act like it is. Let’s accurately label the players, educate the public and maintain the integrity of the fiduciary standard.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based firm that provides investment management services to financial advisors and their clients. He is a 40-year veteran of the financial services industry. He has served as president of five asset management firms and spent the first 15 years of his career practicing securities and ERIS law in Washington, D.C. He can be reached at [email protected].