I have taught a Fundamentals of Financial and Tax Planning course at Eastern Illinois University for the past six years. One topic that I cover in the course is regulation of brokers and investment advisers. My students stare at me in disbelief when I explain that investment advisers are required to act as fiduciaries for their clients–that is, work in the best interests of their clients–while brokers are salespeople who must merely recommend investment products that are suitable for their clients.
Inevitably, a student in the class will ask, “If this is true, why would anyone hire a broker?”
My answer: People hire brokers because they cannot differentiate them from investment advisers.
Brokers (and others selling financial products) use many of the same titles used by investment advisers, such as “financial adviser,” “wealth manager” or “financial planner.” None of those titles are regulated and none of them require adherence to the fiduciary standard.
But based on my research, conducted with Leisa Flynn and G. Wayne Kelly of the University of Southern Mississippi, it is clear that many customers are in the dark when it comes to titles and responsibilities. Our research shows that 55% of our survey participants incorrectly believed that a financial adviser is held to a fiduciary standard; 29% had the same mistaken belief about investment sales representatives.
These results are especially timely given the current debate regarding the Department of Labor’s fiduciary rule that would require brokers to act as a fiduciary for their clients. Last week, the Labor Department proposed delaying the April 10 implementation of the rule by 60 days to give the department time to re-evaluate it. Last month, President Trump ordered a review of the rule’s economic impact on business and investors.
All of this leads me to believe that there is a simpler solution than requiring brokers to act as fiduciaries, albeit one that would likely not fall within the authority of the Labor Department. This solution would be to regulate the job titles that brokers and investment advisers may use so that consumers know whom they are hiring to manage their money. Prohibit brokers from using any title other than investment sales representative. If someone is duly licensed as a broker and an investment adviser, require them to list both titles in their marketing material, with the term “investment sales representative” listed first.
That way, people would immediately know they were hiring somebody who is not bound by the fiduciary rule. With such a clear and simple rule about titles, you would no longer have large chunks of investors believing that “financial advisers” or “wealth managers” are bound by the fiduciary rule.
Opponents of the fiduciary rule have argued that such a rule is unworkable, expensive and would eliminate access to advice for investors with small investment portfolios. The Securities Industry and Financial Markets Association has estimated that it would initially cost brokerage firms $4.7 billion to comply with this rule, with ongoing costs of $1.1 billion.
While I cannot estimate what the cost would be for brokerage firms to change the job titles of their brokers, the ongoing costs would be zero, as firms would simply need to list newly hired brokers as investment sales representatives rather than financial advisers in their marketing material. Furthermore, regulating job titles used by brokers would not prevent anyone from accessing advice.
While I agree with the spirit of the fiduciary rule, I do not think the government should regulate a firm’s business model. Instead, I think the government should regulate transparency and let consumers make an informed decision regarding who should manage their money.
Patrick Lach (@lachfinancial) is an associate professor of finance at Eastern Illinois University and founder of Lach Financial in Louisville, Ky.
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