Financial Advice or Sales?


You should be glad you don’t work as a financial planner who believes in a fiduciary standard—who has pledged to work for the best interests of clients rather than yourself or the company you work for. Why? Because the big sales organizations on Wall Street control the organizations that make our rules.

Case in point is the Securities and Exchange Commission’s new Reg BI—aka Regulation Best Interest. The regulation was supposed to clean up unsavory sales activities and help consumers recognize who is on their side—and, most importantly, who is an insurance or annuity salesperson masquerading as a professional, or somebody who is there to collect assets for an expensive Wall Street investment program.

Alas, Reg BI actually did almost nothing to stop salespeople from calling themselves professional advisors. It even recharacterized their asset gathering and sales activities, on behalf of their brokerage employers, as “best interest.” The result is that consumers have to be extra careful that they aren’t being sold under the guise of advice.

Surely this is too harsh, right? Recently, the state regulators, the North American Securities Administrators Association (NASAA), came out with some data that was designed to help them figure out how to regulate fiduciary advisors, on the one hand, and brokers, on the other, under the SEC’s new rules. The state regulators know a lot more about how brokers conduct themselves than most consumers, and for that reason their report is enlightening.

The NASAA organization sent out questionnaires to brokerage firm reps and advisors. It found that in 2018, brokerage firms were far more likely to sell complex and high-commission products than independent advisory firms—and one suspects that the small number of advisors (3-7 percent) who were selling such products were registered both with the SEC and also with the broker-dealer sales regulator known as FINRA.

The new Reg BI initiative prohibited what were once widespread product-specific sales contests at wirehouses and brokerage firms, but still allowed sales contests, quotas or bonuses for overall sales activity—and the report found that 15% of brokerage firms utilized these contests. Fully 18% of the brokerage firms accepted third-party compensation from another financial institution to push products on their behalf. NASAA found that such activities were extremely rare among independent advisory firms.

Perhaps the most important thing to know is that the Reg BI initiative prohibited brokers and salespeople from calling themselves “advisors” or “advisers.” The report found that well over half of brokerage firms allowed their representatives to call themselves “advisors,” and others simply described themselves as “wealth managers” or “financial consultants.”

The report concluded that “investors seeking the highest standard of care will need to continue exercising caution in taking any securities professional title at face value, and may avoid confusion by simply asking their investment professionals whether or not they are receiving a fiduciary standard of care.”

We agree.

Please Note: This article is used with permission from a newsletter to which KFG subscribes. It is for our clients only and may not be republished.

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