Investment Advice

Background

With nearly half of US households invested in stocks or mutual funds, the role of investment adviser has taken on increasing importance. However, many of these advisers lack the skills, experience, and training to offer advice suitable to their clients’ risk tolerance and financial goals.

According to a poll sponsored by AARP and its partners, 60 percent of Americans believe that the primary service offered by stockbrokers is giving financial advice. And nearly all—97 percent—believe that financial professionals who provide financial advice should put the interests of their client ahead of their own and should have to disclose up-front any fees or commissions they earn, as well as any conflicts of interest.

Many people use titles like “financial advisor,” “financial planner,” and “personal financial consultant” to gain an advantage over other sales professionals. The use of these designations is unregulated, and many such professionals have met no minimum standard requirements. Yet investors are often unaware of this. Obtaining credentials and designations is not required by federal or state law. However, many state securities and insurance regulators do not allow a financial professional to use a designation, including one with “senior” in the title, unless it has been accredited by the American National Standards Institute or the National Commission for Certifying Agencies. The accreditation requirement is designed to ensure that the credential is legitimate.

In order to sell investment products, one must be licensed or registered. Such people use titles including “broker,” “registered representative,” “investment adviser,” and “insurance producer.”

In general investment advisers who manage $100 million or more in client assets must register with the Securities and Exchange Commission (SEC). In most cases those who manage less than $100 million must register with the state securities agency in the state(s) where they do business. The SEC examines investment advisers who are SEC-registered. The states are required to examine investment advisers who register under state law. However, the regularity with which states examine investment advisers varies. States that don’t bill directly for examinations or don’t have adequate resources tend to examine investment advisers less frequently. Brokers are not required to register under the Investment Advisers Act if their advice is “incidental to brokerage activities.”

Independent investment advisers owe a fiduciary duty to their clients and must act in their best interest. Another feature of this fiduciary duty is disclosure, including disclosure of fees and other expenses, as well as any compensation the adviser may receive from sources other than the client. When a broker or dealer makes a recommendation to a retail investor, the recommendation must be suitable to meet the client’s needs. The broker or dealer is not required to disclose other compensation received, including commissions.

As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the SEC studied and issued a report on potential gaps, shortcomings, or overlaps in the standard of care and supervision of broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. The report recommended that the SEC adopt regulations mandating a uniform fiduciary standard of care in the best interest of the client, as authorized under Dodd-Frank. The SEC is expected to issue a rule harmonizing the standards of care for brokers and investment advisers in April 2017.

The Financial Industry Regulatory Authority (FINRA) manages a database of broker registered representatives. Among other information, the database lists complaints against representatives. It discloses the nature and resolution of those complaints. Recently FINRA began listing information about investment adviser representatives who are dually registered as broker representatives. Although it is less well known, the SEC manages a similar database on representatives of investment advisers registered with the commission. Investors must depend on individual states for information on the representatives of state-registered investment advisers.

Investment Advice: Policy

Regulation and licensing of professionals giving investment advice

In this policy: FederalState

Registration as an investment adviser under the Investment Advisers Act (IAA) should not be limited by the type of investment advice or nature of the advising entity.

States should:

  • prevent abuses in financial advising, counseling, and planning by unqualified people or organizations and by unethical or incompetent professionals;
  • regulate advisors who use “senior adviser” or other designations by requiring accreditation by either the American National Standards Institute or the National Commission for Certifying Agencies;
  • require training, testing, and registration of advisers;
  • devote adequate resources (both funding and staffing) to ensure they can adequately examine and monitor investment advisors; and
  • seek to have industry fund licensing and monitoring of advisors through user fees or similar funding mechanisms.

Duty of care

In this policy: FederalState

Optimally, investment professionals should have a fiduciary duty to their clients regardless of the type of license they hold. At a minimum, regulations should be adopted to require that recommendations of annuity and other investment products be suitable to meet the needs of the buyer.

Brokers and investment professionals who provide investment advice should have a fiduciary duty toward their clients.

Sales practices that compromise the suitability of a broker’s recommendation to a customer should be banned.

Advisers should be required to meet established standards of performance and agree to adhere to a code of ethics. Enforcement should apply to advisory firms as well as to their employees.

Consumer redress for losses

In this policy: FederalState

Individuals should be given a private right of action to seek restitution.

Individuals should be given private right of action in civil courts for losses they sustain if their adviser violates the IAA.

State laws should provide more effective consumer redress, and better public education on how to seek redress, of financial malfeasance.

Penalties

In this policy: State

State laws should provide for criminal penalties against those who commit securities fraud.

States should strengthen and enforce existing laws on truth in advertising and other consumer protection laws.

States should provide adequate resources for state enforcement.

Disclosure

In this policy: FederalState

Individuals who work for broker-dealers and sell investment products should be required to disclose their employment history, educational background, and any disciplinary actions taken against them.

The SEC, FINRA, and state regulators should work together to improve and publicize the availability of online background checking features, including BrokerCheck and the SEC’s Investment Adviser Public Disclosure site. States should work together to establish a single website that can be used for checking the backgrounds of state-registered investment advisers, broker representatives, and investment adviser representatives.

State laws should mandate disclosure of self-interest and conflicts of interest (e.g., the amounts of commissions).