They say a picture is worth 1,000 words. In this case “An ‘Adviser’ in Name Only”, a recent editorial in the Investment News, was illustrated with a cartoon of an advisor in a vice grip, being squeezed by a brokerage firm on one side and clients on the other. The intent was to communicate that brokers who call themselves advisors are caught between a rock and a hard place when it comes to doing right by both their firm and their clients. There’s an inherent conflict there, so much so that I’d re-caption the cartoon to show the client in the middle of the vice grip being squeezed by the big brokerage firms on one side and their own broker on the other.
Simply, brokerage firms don’t want their brokers to put their clients’ best interests first. In fact, they insist that brokers are first and foremost loyal to the firm. In fact, Merrill Lynch recently fired a team of top “advisors” because of allegations they had recommended that their clients invest in products outside the firm. As reporter Mason Braswell noted, selling securities without permission or processing them outside of a brokerage’s platform violates firm policy and Financial Industry Regulatory Authority Inc. rules.
Talk about a Catch 22. Recommending a client buy a non-proprietary product not supported by the Merrill platform could be in the client’s best interests, but doing so is forbidden. A broker in this situation cannot possibly act in a fiduciary capacity.
The Securities and Exchange Commission (SEC) continues to review whether all brokers and advisors should operate under the same fiduciary standard and always act in the best interests of clients. (Remember, brokers currently are required to recommend investments that are only “suitable” for their clients.) However, in four years since it was empowered by the Dodd-Frank financial reform law to act, the SEC has been unable to reach a resolution.
Here’s the bottom line, summarized powerfully in the editorial, “Individuals and firms must be held accountable for the titles they use. . . If financial professionals present themselves as advisers when it’s convenient to do so — on business cards and in marketing — but then don’t uphold the position’s fiduciary responsibility, the distinction is muddled and everyone loses.”
Without a uniform fiduciary standard, the public will continue to be confused, and even fooled, by brokers who call themselves as advisors.