Retail Client Confusion Regarding Broker-Dealers and Investment Advisers: Call Me by Your Name

Broker-Dealer Compliance + Regulation
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In a speech on May 2, 2018 regarding the SEC’s recent proposed broker-dealer standard of conduct, Jay Clayton, Chair of the Securities and Exchange Commission (SEC), commented as follows on retail investor confusion over whether their financial service providers are investment advisers or broker-dealers:

“‘Financial advisor,’ ‘financial consultant,’‘wealth manager.’  Your financial professional may have any of a number of different titles that firms use to advertise their services.”

Because of the perceived confusion caused by the titles and names used by broker-dealers and their personnel in particular, the SEC stated in its release proposing a new client relationship summary (Proposed Form CRS) that broker-dealers and their personnel should be restricted from using the specific terms “adviser” or “advisor” when communicating with retail investors (i.e., all natural persons).  According to the SEC, these terms are too close to the term “investment adviser” and should not be used except by a registered investment adviser or by the supervised persons of a registered adviser, in order to avoid investor confusion.

The SEC requests comment on a number of issues related to its proposal, including:

  • Are there additional terms that should be restricted? For example, wealth manager, financial consultant, financial manager, money manager, investment manager, or investment consultant?
  • Is it necessary to put restrictions on the use of names or titles in light of the proposed new Form CRS?
  • Should the proposed restrictions be limited to communications with retail investors?

Our Take

As the SEC itself states in its Form CRS proposal, “both broker-dealers and investment advisers provide investment advice to retail investors, but the regulatory regimes and business models under which they give that advice are different.”  These differences—in compensation structures, conflicts, disclosure obligations, and standards of conduct—can be difficult even for well-trained investment management professionals to perceive and understand.  As a result, it is not clear that simply banning the terms “adviser” and “advisor”—even in conjunction with a new relationship summary—will adequately prevent retail investor confusion.  However, the SEC has put forth a reasonable plan for at least beginning to address investor confusion, and that plan will hopefully only be improved upon during the comment period.

Comments on the SEC’s proposal may be submitted for 90 days following its publication in the Federal Register.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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