FINRA’s Perversion of the Word “Advisor”

Then (1) and (2) can be written

1. If pp, then qq .
2. If qq, then rr .

By the Law of Syllogism, we can deduce;

3. If pp, then rr

or

If it snows today, my fingers will get itchy.

We can use this logical principle to understand that FINRA’s interpretation of the meaning of the word advise(o)r post-Reg BI does not withstand logical scrutiny, using the following simple proof:

P: If an associated person of a Broker Dealer can be called an “adviser”, then they must also be an IAR of an RIA.

The veracity of statement P is supported by FINRA’s issuance of answers to FAQs on Reg BI, available here.

Q: If a financial professional operates as an IAR of an RIA, then under this authority, the individual can receive compensation in exchange for verb, NOT NOUN, delivery.

The veracity of statement Q is supported by Section 202(a)(11) of the Advisers Act, which generally defines an "investment adviser" as any person or firm that: (1) for compensation; (2) is engaged in the business of; (3) providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications. A person or firm must satisfy all three elements to be regulated under the Advisers Act.¹

Said differently, when we add an “r” to the end of a verb to describe a person, we are describing the identity of the person who routinely performs an action. We wouldn’t call a person who once ran across the street a “runner.” We call a person a runner when they routinely run, such that part of their identity can be described by adding an r to the end of the verb they routinely perform. This means that an adviser is a person who routinely advises. Professional advising means to give advice in exchange for compensation.

Thus follows R: If an associated person of a Broker Dealer can be called an “adviser,” then under this authority of the Advisers Act, the individual can receive compensation in exchange for verb, NOT NOUN, delivery.

Using the Law of Syllogism, the term “adviser” must mean “when acting, or intending to act, in an RIA capacity”. Importantly, it should not mean “holds the authority to advise, but has no intention of doing so in this particular relationship”.

Advisor is an earned title that should be used when the person intends to use it with a client. I hold the earned title “Mom,” but other than its use as metaphor in this paragraph, that earned title has nothing to do with my qualifications to write this piece. I am not writing this article in my capacity as “Mom.” It would be neither right nor correct for me to have signed this article, written for a wide financial professional audience, as “Mom.”²

There is nothing wrong with being a dually authorized financial professional. There is nothing wrong with a financial professional who chooses to work exclusively under one or another compensation system. But there is something wrong with rules that cause confusion not only for consumers and the financial professionals that they govern!

Consumers would be better served by outcomes-based regulation of financial advisory conduct than by arbitrary judgments that noun-sellers are necessarily always better than are verb-sellers, or vice versa.

While we are on the subject of the word “advisor,” let’s chat about the regulatory interpretation that “financial advisor” means the same thing as does “investment advisor,” as described in the 40 Act. More on this distinction and its implications coming soon!

Michelle Richter is a principal at Fiduciary Insurance Services, LLC, and executive director of the Institutional Retirement Income Council, Inc.

¹https://www.sec.gov/divisions/investment/iaregulation/memoia.htm

²It might be a little funny though…

Read more articles by Michelle Richter-Gordon