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Abstract

This In Practice piece gives a practitioner’s summary of the article “Brokers or Investment Advisers? The US Public Perception,” by Patrick A. Lach, CFA, Leisa Reinecke Flynn, and G. Wayne Kelly, published in the Third Quarter 2019 issue of the Financial Analysts Journal.

What’s the Investment Issue?

Investment advisers in the United States are held to a “fiduciary standard” by law, meaning they are required to act in the best interests of their clients. Brokers, however, are held to the lower “suitability standard,” where the advice they provide only has to align broadly with client goals and preferences.

But to what extent are retail investors aware of the distinctions between the titles used by investment professionals? A US SEC study, conducted in the aftermath of the 2010 Dodd–Frank Act, revealed evidence that the public is confused about the differences and the individuals’ respective legal obligations.

There is ongoing debate about whether the law should be changed to hold brokers to the more rigorous fiduciary standard. The authors set out to investigate the extent to which the current professional titles are understood by investors—and whether an alternate title for brokers, “investment sales representative,” could provide more clarity.

How Do the Authors Tackle the Issues?

The authors conducted a survey of adults living in the United States in the spring of 2016. Subjects were self-selected, but there was a quota for age and gender. After the subjects were filtered for eligibility, the authors collected responses from 460 adults between the ages of 18 and 84, split evenly between men and women.

The survey posed three questions:

A: Which of the following is held to a “fiduciary standard” by law, meaning they are expected to behave with the highest standard of care and in the best interests of their customers?

B: Which of the following is in the business of selling investments or financial products?

C. Which of the following is paid to provide advice regarding investments?

In each case, there were eight titles to select from: financial advisor, investment adviser, Certified Financial Planner™, broker, wealth manager, investment sales representative, financial planner, and investment adviser representative. The order of the titles was randomized, and subjects were asked to select all they thought applied.

The authors tabulated the responses and divided subjects into groups—by investment industry experience, gender, formal education, and perceived investment knowledge.

What Are the Findings?

In response to Question A—about which titles are held to a fiduciary standard—just 44% of subjects correctly identified investment adviser and 34% investment adviser representative. These were lower than the percentages who incorrectly chose financial advisor (55%) and broker (51%).

In response to Question B, which asked about who is in the business of selling investments or financial products, 62% correctly identified broker and 58% investment sales representative. However, more respondents incorrectly selected investment adviser (36%) than financial advisor (29%)—even though the latter term is unregulated and typically used by brokers.

For Question C—about who is paid to provide advice regarding investments—one correct answer, investment adviser, was the most popular choice (65%). But the other correct choice, investment adviser representative, was selected by just 47%. Half of respondents incorrectly chose broker, while even more (62%) chose financial advisor.

When the participants were divided into groups by common characteristics, every group—categorized by experience, gender, formal education, and perceived investment knowledge—got more answers wrong than right. Contrary to intuition, respondents with industry experience did not significantly outperform those without experience for any of the three questions. Nor did those with higher perceived knowledge perform better than everyone else.

Also belying the authors’ expectations, respondents holding a college or higher degree scored significantly lower than those without a degree on the question about who is paid to provide advice regarding investments. Women significantly outperformed men when identifying professionals in the business of selling investments or financial products.

What Are the Implications for Investors and Investment Professionals?

The results of this survey suggest there may be considerable uncertainty among retail investors about the distinction among investment advisers, brokers, and other titles. This is true even among those with investment industry experience, a college or advanced degree, and a high level of perceived knowledge.

Conspicuously, respondents are confused about the meaning of the term “financial advisor.” The majority believe that financial advisors primarily provide investment advice and are held to a fiduciary standard, even though the title can be used freely by brokers. The implication is that, whether intentionally or not, brokers who call themselves financial advisors are misleading the public. Conversely, the survey revealed that participants are more likely to correctly associate the responsibilities of a broker with the title of “investment sales representative.”

For investment professionals, the implications can be felt in possible changes to the law mandating that brokers be held to a fiduciary standard. One objection to such a change is that it would be costly. The authors argue that barring brokers from using ambiguous, unregulated titles such as “financial advisor,” in favor of more transparent titles such as “investment sales representative,” would be a cost-effective way to dispel uncertainty—whether the law around fiduciary obligations is changed or not.

About the Author(s)

Keyur Patel

Keyur Patel is a London-based financial journalist.

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