Five hybrid broker-dealers in the country got failing grades for their customer relationship summaries (CRS), according to a new study released by the Institute for the Fiduciary Standard. The study was conducted for the Institute by The Plain Language Group.

In recent years, a growing number of advisors affiliated with independent broker-dealers (IBDs) have opted to relinquish their securities licenses and go RIA-only, making themselves full-fledged fiduciaries, subject to Securities and Exchange Commission investment advisor regulation. However, they continue to be supervised by IBD compliance departments that are trained to operate in a Finra-regulated, broker-dealer world where the "F word," fiduciary, is viewed as a major liability and something to be avoided whenever possible.

This creates another layer of potential conflict, in the view of the institute, which has been a constant critic of the brokerage industry. The study found the CRS forms prepared by the hybrid firms, which offer both commission and fee-based advice, were plagued by “the omission of many material facts.”

The omissions derailed investors’ ability to understand how services, loyalties, fees and conflicts of interest could impact their relationship with the six large hybrid broker-dealers studied, including Ameriprise, Commonwealth, Equitable Advisors, Royal Alliance, SagePoint and Wells Fargo, the institute found.

All but Ameriprise were given a failing grade by the Plain Language Group, a firm that tests the effectiveness of financial services firms’ written investor disclosures and communications. Ameriprise, Commonwealth and Equitable Advisors did not immediately return a request for comment.

“All six firms need improvement if we are to create a form that investors can understand,” said institute president Knut Rostad said at a press conference to release the results yesterday.

In addition to omitting critical facts about services, “none of the firms stated that the BD standard is a lesser, more conflicted or more limited standard. They did not state that the BD standard only applies when a recommendation is made or that the BD acts as an agent for and has a duty of loyalty to issuers,” the study found.

Rostad said he has had three meetings with SEC officials in the past month to present the study findings and urge the commission to provide additional guidance to make form CRS more useful to investors.

“We are asking for additional guidance about what should be on form CRS and how it should be drafted. We believe it could actually become useful for consumers, but that is only going to happen if firms disclose material information and show the differences between RIAs and broker-dealers, their core business and their purpose,” Rostad said.

Additional testing of the CRS forms of 30 fee-only investment advisors with assets under management between $1 billion and $3 billion revealed the widespread practice of omitting even the mention of fiduciary status. Only six of the 30 firms mentioned the word "fiduciary" and only two of the six described what it meant.

Rostad called it shocking that “the term fiduciary, the single [biggest] differentiator between types of firms, has been eliminated from forms that are supposed to highlight material facts. Instead, we see form CRS that highlight[s] similarities and product fee schedules.”

Bill Prewitt, founder and chief compliance officer of wealth management firm Charleston Financial, said at the press conference he was not surprised advisor disclosures are light on fiduciary descriptions. “In preparing our form, I heeded advice from experts to downplay any mention of fiduciary,” said Prewitt, who added the firms’ advisors are seeing more investors who ask if they’re fiduciaries than ever before, mainly because of the job the media has done educating consumers, Prewitt added.

Scott Mackillop, CEO of First Ascent, said at the press conference that the confusion playing out in relationship summaries is a result “of the past 20 to 25 years of the SEC trying to figure out what to do with the brokerage industry as it moved more and more into the advice industry.”

As a result, “the SEC hasn’t been very successful in articulating what the standards are or communicating them to the public…so the investing public is not able to distinguish between groups operating under different standards,” he said.

Added Mackillop, “I wish I had more faith that the SEC was going to go back and help.”

To help advisors and the SEC clear up confusion, Rostad released sample language he said “highlights material facts that expose differences” between RIAs and BDs.

“As an investment advisor, we always act as a fiduciary to you and put your interests first, while, by law, a broker-dealer is not required to put your interests first,” one example states.

“Fiduciary applies, by law, to ‘the entire relationship between an adviser and its client,’ while the broker-dealer standard only applies “when the recommendation is made,” the institute said.