Can A Person Holding A Series 6 Or 63 License Provide Fiduciary Services
Executive Summary
With the flurry of activity and attention surrounding the Department of Labor's fiduciary rule and whether it will be delayed or not, there has been a dramatic increase in media coverage around what it means to be a fiduciary, and a push button for consumers to seek out RIAs over those who work at broker-dealers. Despite the fact that most advisors, at both RIAs andbroker-dealers, are trying to do the right thing for their clients.
In this calendar week's #OfficeHours with @MichaelKitces, my Tuesday 1PM EST circulate via Periscope, nosotros discuss why being a fiduciary matters, and why Serial 7 licensees technically Can'T be full fiduciaries to their clients without the DoL fiduciary rule.
The key consequence is that the Serial 7 exam is technically the "Full general Securities Representative Examination". This name is important, considering it indicates that ultimately, the licensee is acting equally a representative of the banker-dealer. In other words, a Series 7 license allows an individual to represent the broker-dealer in the sale of securities products to clients. This is why Series vii licensees are referred to every bit "Registered Representatives" of a particular broker-dealer.
And equally a representative of the banker-dealer, the broker technically has an obligation to serve the banker-dealer,not the client. This is why a broker-dealer can terminate a broker for outside business organization activeness, or for soliciting a client to move with them to a new broker-dealer. In fact, technically the customer isn't even a client of the banker's; information technology's a client of the broker-dealer's, and the broker is only the sales representative. That's why it'southward illegal for the broker to accept any client information when changing broker-dealers!
Of course, in today'due south environment, the overwhelming majority of those working at a broker-dealer are dual-registered as a sales rep under the broker-dealer and working nether a corporate RIA. Nonetheless, anytime the broker sells a product and earns a commission (i.eastward., using the Series 7 license), the broker is not a fiduciary, simply a sales representative! Notably, these advisors are fiduciaries when they give nether the RIA and are paid an advisory fee. But they are even so finer wearing two hats, and cannot be full fiduciaries while the Series 7 hat is on!
And the reason all this matters is because, if someonewantsto take money from their clients past selling high-commission products to anyone they can, the suitability standard that applies to brokers is a relatively low caveat-emptor bar. But a fiduciary standard doesn't legally permit such beliefs. That's why it matters - it'southward non about the already-good advisors who are doing the right thing, only almost raising the bar to reduce the adventure of bad brokers who try to practise the worst they (legally) tin can. Which is why the focus on fiduciaries vs non-fiduciaries has morphed into a discussion of RIAs vs broker-dealers. Because the "easiest" way for the media to recommend fugitive a bad non-fiduciary (banker) is simply to recommend avoiding all of them.
The bottom line, though, is to recognize that Series 7 licensees are legally sales representatives. And if yous don't like being treated equally a salesperson, (re-)consider how your business is structured! Although ironically, if the DoL fiduciary rule does not get delayed, it may all soon be a moot point - as anybody working with retirement investors will be subject to the same fiduciary duty, regardless of their current business model! Ultimately, though, until brokers either voluntarily move to a new business organisation model or are held to new DoL fiduciary standards, the reality will remain that you tin can't be a total fiduciary with a Series 7 license!
(Michael's Note: The video beneath was recorded using Periscope, and appear via Twitter. If yous desire to participate in the next #OfficeHours alive, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you lot get the announcement when the broadcast is starting, at/effectually 1PM EST every Tuesday! You tin also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Role Hours with Michael Kitces!
With the flurry of activity surrounding Department of Labor'southward fiduciary rule and whether information technology will be delayed or not, there's been a huge increase in media coverage around what information technology means to be a fiduciary in the first place and why it matters for consumers. And as a result, more and more consumers seem to actually be request questions nearly whether the person they piece of work with is a fiduciary or non, which in today's market, favors the RIA channel, and puts growing pressure on those who work in insurance companies and banker-dealers.
In that context, I want to kick off this week's "Office Hours" with a recent question that came to me from an advisor friend who built his practice under...let'due south simply say, a "well-known independent broker-dealer". We'll call him "Jim". So Jim sent me this message recently, and it said:
"Michael, I built my practise by doing the right things for my client from day one, and I've ever acted as a fiduciary to my clients. It's just good business. Why do we have to brand this most RIAs versus broker-dealers, instead of simply talking virtually who'due south doing the right matter for their clients?"
Amen, Jim. Great question. I'm seeing this discussion come up upwards more and more lately, particularly from those who piece of work under a broker-dealer and actually do effort to give advice in the best interests of their clients, and maybe only utilize commission-based products when information technology's genuinely prudent to practise so because it's actually what the customer needs.
But here is the claiming and why it matters... considering from the legal perspective, the nature of the human relationship with a client actually is different when yous're under a banker-dealer versus an RIA. I know we similar to all call ourselves "advisors", regardless of which aqueduct we work in, but the reality is that, technically, you can't actually be a fiduciary to a client based on a Serial 7 license.
Why A Series vii Licensee Can't Be A Fiduciary [Time - one:46]
I realize that's a stiff statement to brand – that yous can't exist a fiduciary to a client based on a Series 7 license – so let me explicate farther.
The Series 7 test, which is what nearly everyone in today's globe takes when they're going to work nether a broker-dealer, is actually simply a shortened label. The full name for the Series 7 exam is the "Full general Securities Representative Examination".
At present, the "general securities" part means the licensing exam pertains to any and all "full general" types of investment securities. By contrast, the Series 6 exam is a "mutual funds and variable products securities representative". But the Series 7 is a General Securities Representative examination. Thus, the Series 7 licenses you to sell mutual funds and variable annuities, just also stocks and corporate bonds, annuities, direct participation programs, etc.
But information technology's the 2d part of the Series seven exam championship that matters here. It's the Full general Securities Representative Exam. Representative of what? Representative of the broker-dealer. In other words, when you lot accept the Series 7 examination, quite literally, it'south a license to let y'all to represent the broker-dealer in the auction of its products.
That's why you lot have to be sponsored by a broker-dealer to accept the examination, because yous can't, working directly as an independent advisor with a client, sit for the Series 7 exam. You lot're a representative of the broker-dealer. They have to sponsor you to take the examination so you lot can go their rep!
Similarly, that'south why you take to put on your business organisation card, the footnote of your website, and any piece of paper you ever manus to the customer, that disclaimer: "So-and-so is a registered representative of the Such-and-such broker-dealer". Because legally, you lot're not there to give advice to the client. In fact, information technology's non even actually your client. It's the broker'due south dealer's client, and you lot are a sales representative of the banker-dealer.
Now, I know that sounds harsh for some of you that are working in a banker-dealer. Y'all may fifty-fifty be angry with me right now for calling you lot a sales rep. Merely please don't shoot the messenger. It's but the actual legal reality of how the laws are written.
In fact, the whole reason y'all're non subject to a fiduciary duty now as a Series 7 rep under the Investment Adviser's Act of 1940 is that the Adviser's Act has an exclusion that says if y'all work for a broker-dealer and your advice is solely incidental to the auction of brokerage products, you don't have to become an RIA.
So literally, the only way yous avert being an RIA under current constabulary is that you have to non be in the business of giving advice and primarily be in the business of selling the products of your banker-dealer!
Brokers Are Obligated To Their Broker-Dealer Over Their Clients [Time - 4:30]
Hither's why that matters from the perspective of this question being a fiduciary to your customer... considering when it's not your client – it'due south the banker dealer'southward client and you piece of work as a sales rep for your banker dealer's products – legally, your duty is not to the client. It actually tin can't be. Your duty is to the broker-dealer that yous represent.
That'south why when you leave a broker-dealer, you can't accept your client information with you. You can't have your client files. You can't accept the financial plans. You can't even take a listing of their account numbers. At best, the broker protocol simply allows you to take basic names and contact data. And really, that's just considering you can look it up online anyway at this point! It's barely individual information!
Similarly, that'southward why even if yous mention to your clients that you're planning to change broker-dealers, your broker-dealer can terminate you immediately with a U-five. It's not just because they're afraid you're going to go out and want to preemptively fire you. It's because soliciting clients for your new business while you're still a representative of their concern is a breach of your employment contract with your broker-dealer. Because it'due south the broker dealer's client, and legally, you are a sales rep of the broker-dealer.
And that's why even nether the Department of Labor's fiduciary proposal, as the broker, you would not actually exist signing the Best Interest Contract with your client. The contract gets signed with the broker-dealer. Because, technically, the banker-dealer is the one with the client relationship, and the broker-dealer is the one that is going to be held to a fiduciary duty. At present, plainly if you work under a broker-dealer as their rep, if the BD has a fiduciary obligation, they will impose that expectation on you to besides human activity as a fiduciary. But information technology'south still bailiwick to their oversight, because technically, y'all're withal not the fiduciary. The broker-dealer is the fiduciary. You lot're the fiduciary's fiduciary rep!
Dual-Registered And Hybrid RIA Fiduciaries [Time - six:15]
It'south worth nada that in today'due south environment, the overwhelming majority of those who work in a broker-dealer actually are dual-registered equally a sales representative of their broker-dealer and work either under their corporate RIA or maybe a hybrid advisor with their ain outside RIA.
In that instance, you're effectively wearing two hats. One truly is a fiduciary under the RIA, and the other is as a sales rep for the broker-dealer. When you lot sell a product and generate an club commission, you're not an advisor or a fiduciary, you're a sales representative. When you separately give actual advice under the RIA and get paid an informational fee, so you're actually operating as a fiduciary.
Although notably, even in the latter scenario, you're actually technically however a rep. Y'all're an investment counselor representative, or IAR, of the corporate RIA, but that really still means it'south not your customer. You must honour your employment contract with your RIA, first and foremost. But since the RIA is held to a fiduciary duty and they want you as their rep to laurels that, they'll be held answerable, then you're held answerable every bit a fiduciary under their supervision.
Why Beingness A Fiduciary Is Different Than But Acting Similar One [Fourth dimension - seven:11]
Simply hither is the fundamental point, in the context of the earlier conversation well-nigh why trying to do the right thing for your client and acting as a fiduciary is dissimilar than whether you legally are one...
It's pretty universal that trying to do the right affair for your client is good for business organisation in the long run. And I know most advisors practise this. I meet thousands of advisors at banker-dealers when I speak at their national conferences, and I know that most of us in the industry - regardless of RIA or broker-dealer aqueduct - are really trying to practise the correct thing for our clients. And not considering we're legally obligated to, but simply because nosotros took this chore to help people, and it'south adept for business to truly try to aid them and serve their interests.
But the legal reality is still that you're not a fiduciary, and y'all tin't be a fiduciary that puts your clients' interests first in all situations, because you still accept a chief legal obligation to stand for your broker-dealer and their interests instead. And the very fact that you're operating under a Serial 6 or Series seven license, which once more, literally are sales representative examinations - information technology has "rep" in the title - precludes your ability to fully act as a fiduciary for clients.
You may still exist doing the right thing for your clients, regardless of all of this legal stuff, and say it'southward a moot indicate. But the trouble is nonetheless that you're not obligated to, or perchance it's more than accurate to say, "The other brokers in your business firm are non obligated to," and this is why the media picks on it. Because the only thing the other reps in your firm are obligated to exercise is provide their disclosure information to every client, and affirm basic suitability before they sell the highest-commission production they possibly can. And it'south legal because information technology was a product sale, not communication, so it's caveat emptor and non subject to the fiduciary duty.
Call back of it from the other perspective. Imagine yous're a bad counselor...or y'all're not even an advisor. You're an evil sales dude whose goal is to go every bit many clients as possible to office with as much of their money as you can.
Basically, you have three choices: number i, steal their coin; number two, sell products that pay behemothic commissions; number three, get paid a 1% advisory fee. Now, number one, stealing, it is outright illegal in any world, so non a very highly-seasoned selection to risk jail time. Number 3, getting paid a 1% advisory fee, is a really slow manner to take your client's money, and non really helpful if you're trying to do bad things. But number two... overwhelm people with disclosures, make your complex sales pitch, go them to say yes once in a moment of weakness so they can't take information technology back because there are surrender charges, and yous can take 10% of the net worth of everyone you encounter! That's a pretty sweet opportunity.
And that's why the fiduciary duty matters. It's not most trying to force you lot, the banker who is already trying to practice the right thing, to practice the right thing. It'south to screen out the people who might be posing every bit advisors but trulyarejust trying to sell the crappiest high-commission product they legally can.
In other words, fiduciary is nigh raising the minimum bar on what the worst person in your organization might do if they wanted to be nefarious. Because again, every bit a Serial vii rep, you have no obligation to be a fiduciary. It might be good long-term business to practise the right matter. Simply unfortunately, it'south likewise a pretty adept short-term business to sell the crap out of the highest-commission product you tin find, and greenbacks out, and movement on subsequently to another concern if yous have to.
So equally long as that tension exists - every bit long as there are sales reps at broker-dealers who are but required to fulfill their minimal obligations to their broker-dealer equally a auction rep and have no obligations to the client and are subject to lower standards - the fiduciary standard volition continue to exist an consequence. And particularly as long as sales reps continue to concur out to the public every bit advisors, considering now the public tin can't actually tell who's a sales rep and who's a fiduciary.
Except, the public actually canidentify the difference between a sale rep and a fiduciary, which the media now has picked up on... because sales reps, past definition, work at broker-dealers, and fiduciaries work under an RIA. That's why yous're seeing this dynamic emerge where what started out as fiduciary versus suitability is at present morphing into advisors versus sales people and RIAs versus banker-dealers.
How DoL Fiduciary Equalizes Broker-Dealers And RIAs [Time - 7:11]
Simply the lesser line, getting dorsum to Jim'due south question, is that if yous don't like this environment and being called a sales person and dealing with the scrutiny on yous, frankly, I'd ask you to consider how you're structured and whether you desire to change it. Because as long as y'all choose to operate under a Serial 7 license as a sales rep of a broker-dealer, you lot are legally a sales rep. That's the job and its legal condition. That'due south why you accept a duty to your broker-dealer. That's why they tin burn down you for breaching it. That's why you tin't take your clients when you exit. That'southward certainly why you can't sell the business and the clients in information technology the style that you can with an RIA.
Which means if you actually desire to operate every bit an advisor and concord out that way and not be a sales rep, you need to be affiliated with an RIA. That's just the legal reality of how the rules are structured.
Now, ironically, if the fiduciary rule does not get delayed and actually goes through, so suddenly everyone, regardless of whether they're at a broker-dealer or an RIA, actually becomes subject to the same fiduciary duty. It doesn't affair whether the client engages through a BD or an RIA. And so this whole fiduciary discussion, and even much of the discussion about RIAs versus banker-dealers volition become a moot bespeak.
So if you're frustrated with the electric current fiduciary word, and you're in a broker-dealer surround, you should actually be hoping the fiduciary rule goes through from the Department of Labor! Because it levels the playing field. It takes the fiduciary question off the plate every bit a potential objection or concern, because at present banker-dealers can exist held to a like fiduciary duty as the RIA, and and then fiduciary would no longer exist a differentiating discussion. At least pertaining to retirement investors, every bit that's the limited scope of the DOL's rule.
In the concurrently, I hope that provides some nutrient for thought around fiduciary versus suitability, and why nosotros're seeing this morph into an RIA versus broker-dealer discussion. This is "Office Hours" with Michael Kitces, 1 p.thousand. East Coast time on Tuesdays. Thanks for joining us and have a great day everyone!
So what practice you think? Can someone with a Series vii be a fiduciary? Have yous noticed the dialogue effectually fiduciary versus suitability shifting? Does actually being a fiduciary matter more simply acting like one? Delight share your thoughts in the comments below!
Can A Person Holding A Series 6 Or 63 License Provide Fiduciary Services,
Source: https://www.kitces.com/blog/fiduciary-duty-broker-dealer-series-7-license-general-securities-representative-exam/
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