Over the past few years, and especially as regulators and the financial services industry have sparred openly on amendments to conduct guidance for various forms of financial professionals, I have given a lot of thought to my personal beliefs around the meaning of the earned title “adviser”.
As a former principal of a Fortune 100 Mutual Life Insurer’s B/D and Corporate RIA, with tri-hatted career agent/advisers as our primary distribution channel, I got the opportunity to sit in early (and often!) on many a spirited dialogue between compliance and distribution professionals over how important each side felt the difference between the representations “adviser” and “advisor” were to their respective roles. Back then, there was a perception that “adviser” (RIA/IAR entitled to 40 Act protections) may have had a legal meaning different from the meaning of “advisor” (not legally defined, but many IARs felt that this spelling conveyed more expertise, as well as an identity marker by the doer, as one who routinely engages in the activity in question).
Effective August 4th 2020, the SEC laid to rest this seemingly esoteric, but to some existential, spelling debate, leaving no wiggle-room of difference in interpretation between the two spellings for those who are dual-registered/hybrid distributors. (Coverage from ThinkAdvisor on this subject here: https://www.thinkadvisor.com/2020/08/12/sec-clarifies-use-of-advisor-adviser-by-dually-registered-firms/)
What looks from the outside like a silly industry-wide spelling test began for one reason, and one reason only: because consumer perception of a person who holds themself out as an advisor is different from their perception of someone representing themself as a person who sells products for a living. My own opinion is that either construct can be an honorable career choice, as long as all involved are clear in what we represent that we do, and we follow the rules of the regulators assigned to our role. So it is with this perspective in mind, and with exactly how long I have been awaiting this moment of legal clarification on the meaning of “advisor”, that I reflect my disappointment in the “clarity” I’ve received to date, especially with respect to what that word might mean to my native insurance industry, which has always operated only from the perspective of sold product containers, and thus does not enjoy a coordinated regulatory perspective on what the term insurance “advice” means.
Following from the above, I face two very material challenges when I try to interpret for both myself and my clients the guidance I have seen so far around the meaning of the word “adviser”, first in the investment industry (Challenge #1), and then separately, in the insurance industry (Challenge #2).
Challenge #1: I am unable to find logical support for the way adviser has been defined in a hybrid context. Specifically, I am unable to find support for the premise of using the word “adviser” when discussing product sales, as I believe product sales are very clearly not an advice function.
Challenge #2: From there, since product sales are not an advice function, and since insurance has always been historically understood through the lens of sold product, is there an appropriate way for there to come to be a premise of “insurance advice”?
Interpreting the meaning of “adviser” in insurance and financial services:
Challenge #1: How do I reconcile Logical Statement A below with Logical Statement B below?
As an outcome of significant recent legal disputes over first DOL Fiduciary, then Regulation Best Interest guidance, the hybrid distribution construct popular in the wirehouse and other channels has been determined permissible to continue, and the term advisor (either spelling) is deemed legally acceptable to use at all times by individuals who are authorized as hybrids.
Accordingly, so follows logical statement A:
Logical Statement A: If a financial professional (FP) is authorized to sometimes deliver services by charging fees for advice, then they can be called “adviser” at all times.
(This means, the person is an IAR of an RIA, or is an RIA, irrespective of whether or not such authorization is being utilized with the client in question, either spelling of advisor)
In logic, for every true statement, its opposite (contrapositive, if you’re following me all the way to the end of the language nerd rainbow!) is also true.
That means in this case, Not A (A’s contrapositive) is: If an FP is not authorized to sometimes deliver services by charging fees for advice, then they cannot be called an adviser (neither spelling is permitted now). (post 6/30, there is no other logical interpretation than either: “is a reg rep” and/or “is an agent”, while not having an RIA affiliation)
So, the following is when I find myself in a logical conundrum, trying to reconcile the meaning of adviser from logical statement A, with equally true Logical Statement B, which conflicts directly with Statement A:
Logical statement B: If an FP is authorized to receive compensation in exchange for product sales, then they must be either a registered representative of a BD, or an agent.
That means in this case, Not B (B’s contrapositive) is: If an FP is not authorized to receive compensation in exchange for product sales, then the FP must be neither a registered representative, nor an agent. (there is no other logical interpretation from this premise for an FP that is neither a reg rep nor an agent than “is a (fee-only) adviser”- i.e., is an IAR or RIA)
Since “Not B” has the same meaning in the logical flow above as does “adviser”, logically, this can only mean, advisers don’t sell product. Advisers are people who act in an advice capacity, and product sales are not an advice function. Advisors don’t make product sales. Advisers advise clients, about assets, or about other financial choices. Hybrids, reg reps, and agents sell products. Even though it is currently legal to be illogical, it isn’t per se good advice to knowingly choose illogic. There can be no other logically supportable argument than that the term “advisor” for a hybrid should be used when acting, or intending to act, in an advice capacity. Thus the phrase, recently seen in a publication highly respected by this author, “advisors whose product sales comprise x% of their revenue” perpetuates not only consumer misunderstanding regarding the difference in role between broker and advisor, but also leads to identity conflation for hybrid financial professionals when confusing product sales with their job as an adviser.
Challenge #2: What would it mean to act in an advice capacity in the context of insurance?
This subject will be covered in next week’s blog: How New Ideas Can Happen in Insurance, Part II: Defining the role of “Insurance Adviso(e)r”!
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