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.