Advisor Series: Don’t Call Them Advisors
Reported in Investment News and later picked up by Reuters, Merrill Lynch has asked two advisors who managed about $2.5 billion to leave the firm after they allegedly guided clients to investments outside of the firm. The pair was thought to violate regulatory rules and company rules prohibiting the sale of securities outside of the firm’s own platform. Conjecture had it that the investments were hedge funds not available through the company. Later this was disputed and the recommendations may have been to direct clients to invest in some of the same investments that the advisors were in. Just not at Merrill, this got them canned.
From an editorial in Investment News a week later:
If recommending that clients buy off a platform is in their best interests, but doing so is forbidden, an advisor in this situation cannot possibly act in a fiduciary capacity.
The question of whether all advisers should be held to a fiduciary standard becomes meaningless. They can’t when the broker-dealer’s interests bump up against the client’s own.
Let’s try an analogy. You are buying a new car and are greeted at the Ford dealership by Fred, who will be you ‘advisor.’ Now, you can ask Fred all about the difference between this and that and whether a Ford or Toyota would be better for you. But Fred is a salesman, he is supposed to sell you a Ford or the dealer will let him go. The same thing just happened to the Merrill Lynch salesmen.
This is all about the meaning of the word ‘advisor’ and ultimately lands at the feet of the SEC and Congress. The Investment Advisor Act of 1940 is clear on the fiduciary nature of giving advice. It is just not enforced. My opinion is that the Dodd Frank Act creates a question of who will be called a fiduciary and what it will mean. The big brokerages don’t have a business model that supports the concept so they would like to water down the meaning. Fee only advisors hate this idea but have difficulty raising their voices (dollars) to the same level as the brokers. Congress is loath to do anything and the dithering continues.
I am concerned that the result will do nothing to advance the cause of fiduciary while opening the door wide enough to let every salesman out there call himself an advisor. Instead, it could be so simple. Don’t let anyone be called an advisor who cannot meet the ‘best interests’ and ‘duty of care’ standards as they were intended by the 72 year old Investment Advisors Act of 1940.
Written by Bob Stowe, CFP®