New rules maintain dual standards for responsibilities

Consumers often assume that their financial advisors are putting the customer’s interests ahead of their own, but that is not necessarily the case. Although two federal regulators have now harmonized their rules for financial advice, two different standards remain in the marketplace that are likely to continue causing confusion for consumers.

For decades, Registered Investment Advisors (RIAs) have been classified as fiduciaries, requiring them to act in the best interests of their clients – regardless of their own interests or those of their firms. Meanwhile, broker-dealers were held to what the SEC termed a “quasi-fiduciary” standard to make suitable recommendations to clients. An attempt by the U.S.

Department of Labor to hold brokers to the same fiduciary standards as RIAs was struck down in 2018 by a federal appeals court.

Earlier this year, the SEC addressed the issue with Regulation Best Interest, which requires brokers to act in the “best interest” of their clients. After the SEC regulation survived a federal court challenged in June 2020, the Labor Department adopted an identical rule that aligns its regulations with the SEC. The Office of Management and Budget provided final approval for the Labor rule in November.

The new rules do not hold brokers to the fiduciary standard, but they do provide a higher standard than the previous “suitability” standard. However, none of these new rules alter the fiduciary standard for investment advisors.

With each type of financial professional held to a different ethical standard, consumers are likely to continue facing confusion when trying to distinguish between the duties of brokers and investment advisors

“Unfortunately, I think it is very difficult of consumers to distinguish between a fiduciary, broker, and dual registered advisor,” said Brice P. Carter, CFP®, CIO and financial advisor at Financial Strategies Group, Inc., in Flint, Michigan.

”We all have similar titles and often similar designations, confusing the matters even more,” Carter noted. “As an industry we need to do a better job of educating consumers on the differences between these business models and the corresponding obligations to clients.”

Randy Kurtz, CFP®, chief investment officer at Upper Left Wealth Management, LLC, in Chicago, agreed the differences can be confusing.

“Technically, a broker has a Series 7 license {obtained by passing the General Securities Representative Qualification Examination} and works at a broker dealer such as Wells Fargo or Raymond James,” Kurtz explained. “A broker must ensure that investments he or she recommends to a client are ‘suitable’ for that client.”

In contrast, a fiduciary is governed by a Series 65 license (Uniform Investment Advisor Law Examination) and is often referred to as an investment advisor, he continued. As a fiduciary, they must act in the client’s best interests – a much higher standard than recommending “suitable” investments or acting in the client’s “best interest”. A dually registered person has at least two licenses, a Series 7 and a Series 65.

“At the end of the day, these are technical structures that say little about the broker or advisor,” Kurtz added. “I have seen brokers act in the best interest of their clients, and I have seen advisors not do the same. While I am a fiduciary, I find it more important to know the broker or advisor as a person. Character counts more than which test someone has taken and passed.”

Kurt C. Jackson, CFP®, CEO/Founder, Central Coast Wealth Management, San Luis Obispo, California, added, “Most clients today who have done homework on the various types of ‘professionals’ really don’t know the difference. In general, the accepted standard that seems to be the ‘right’ way is the fiduciary standard. Unfortunately, clients don’t know what they don’t know.”

There is no one “right” answer for every client’s needs, Jackson said. While the term “fiduciary” might sound like the ideal solution, a fee-only professional may not necessarily be the right choice.

Jackson is a dual-registered IRA (independent investment representative) of a RIA, a FINRA-registered representative, and an insurance agent. He typically deals with high-net-worth multigenerational families who prefer work with a certified financial planner who will oversee all their financial affairs alongside their CPA and estate planning attorney.

“There are plenty of fee only RIA ‘fiduciaries’ who don’t understand the complexities of insurance policies, LTC contracts and older annuities,” Jackson said. “They are primarily interested in simply gathering client assets, and putting them in preprogrammed, low-maintenance, outsourced money management with the long-term intent of selling that business as part of their own retirement plan.”

Jackson noted most fiduciaries operate on a fee-only basis and market that characteristic heavily. There are few broker-only professionals are now in the industry, he continued, as most people entering the business prefer to also offer additional services such as financial planning. However, Jackson continued, most CFPs tend to fall in the dual-registered category. A dual-registered advisor can charge a fee for fiduciary work as well as perform some broker functions that use investments or strategies where they are compensated by commissions rather than fees.

“I pity the client looking for a new wealth management specialist because they may pick the wrong one – someone who may not be set up to do business, or who elects to focus on the one specialty that is most lucrative for them,” Jackson added. “In my opinion, only dually registered professionals can truly access all of the various vehicles to get clients from where they are now to what they want their legacy to be. Unfortunately, clients who focus on just working with fee-only professionals or brokers may unknowingly be limiting themselves.”

Jackson added, “Wouldn’t it be nice if someday, the CFP – like the MD or JD – was the barrier into this profession and the term ‘financial advisor’ actually meant that you had to advise on all aspects of a client’s financial life, no matter how you were paid? Perhaps I am biased, but in my professional opinion, until that day comes, the dually registered CFP is your next best choice.”