Friday, April 19, 2013

It's Time to Take Action to Combat Fraud - Examining the Use of "Advisor" or "Consultant" Title by Non-Fiduciaries in the Securities Industry; How YOU Can Help

If you are a registered representative or insurance agent and also call yourself a “financial advisor” or “financial consultant,” is this fraud? Should you be required to adhere to a fiduciary standard of conduct? Should you be prosecuted if you do not?

Gil Weinrich’s article, “A Modest Proposal: Prosecute Non-Fiduciaries Using Term ‘Advisor’ (Dalbar CEO Lou Harvey reacts to Tibergien’s lament about ‘fiduciaries in name only’) fell on favorable ears at fi360’s 2013 Annual Conference in Scottsdale, Arizona this week. See the article at AdvisorOne, located at Gil Weinrich quoted Dalbar’s CEO Lou Harvey as stating: “Imagine, for example, if anyone could describe themselves as ‘doctor’ or ‘attorney’ but the real ones were ‘fiduciary doctor’ and ‘fiduciary attorney,’ … .” The article goes on to state: “The heart of Harvey’s proposal is to restrict the use of the word ‘advisor’ (or ‘adviser’) to fiduciaries alone, leading to prosecution for non-fiduciaries using that label.

At the fi360 Annual Conference, Skip Schweiss, President of TD Ameritrade Trust Company, pointed out Lou Harvey’s suggestion during a panel discussion in which I participated. Skip also suggested that anyone calling himself or herself a “financial advisor” or “financial consultant” be held to the fiduciary standard of conduct.

In this blog post, please permit me to add some additional context to the discussion, through a review of judicial decisions and statements by the U.S. Securities & Exchange Commission. In the paragraphs that follow I provide the following:
  1. ·       A foundational review of the two types of relationships which exist under the law;
  2. ·       A review of the fact that the provision of advice usually results in fiduciary status to attach to the advice provider;
  3. ·       A recollection of recent academic support that calling oneself as an “advisor” while not accepting fiduciary status constitutes fraud;
  4. ·       An explanation of the maxim that “two hats” cannot be worn at the same time;
  5. ·       A review the varying positions of the SEC on this issue;
  6. ·       A survey of several recent court decisions, relating to the use of titles and imposition of fiduciary status on brokers and/or insurance agents; and
  7. ·       Recommendations for action YOU can take.


As readers are already likely aware, service provider – consumer relationships between two parties fall into one of two categories.  The first category is that in which arms-length negotiations between the parties take place.  In the context of the securities industry, the relationship is generally mapped as follows: PRODUCT MANUFACTURERS ⇒   MANUFACTURERS’ (SALES) REPRESENTATIVES ⇒   CUSTOMER. The customer, in this instance, is largely responsible to protect himself or herself. In general, the principle of caveat emptor (“let the buyer beware”) applies.

The purchaser of an investment product is sometimes aided by specific laws that impose additional duties on the seller and/or the seller’s agent (i.e., broker) which do not arise to the level of fiduciary protections. For example, upon broker-dealers there is imposed the requirement that investment products sold to an investor be “suitable,” at least with regard to the risks associated with that investment. Additionally, select disclosures of information may be required of broker-dealers under federal securities laws. Yet, even with somewhat (and, I would argue, ineffective) additional safeguards, the arms-length relationship of the parties involved in the sale of an investment product still exists. The customer must still protect his or her own interests; the seller of the product (whether an employee of the product manufacturer, or another intermediary, such as a broker) is generally not a fiduciary to the customer (absent a relationship of trust and confidence being formed, or the application of ERISA’s fiduciary standards, or some other manner in which fiduciary status may result). In non-fiduciary, arms-length relationships, the product salesperson (broker) acts as the representative of the product manufacturer during negotiations with a customer.
By contrast, the fiduciary relationship arises in situations where the law has clearly recognized that fiduciary duties attach, such as principal-agent relationships and trustee-beneficiary relationships, or where there exists the actual placing of trust and confidence by one party in another and a great disparity of position and influence between the parties. In these situations, mere disclosure of material facts is thought to be inadequate as a means of consumer protection, and hence the fiduciary standards of conduct are imposed. The relationship of the parties in a fiduciary relationship is reversed, as follows: CLIENT ⇒   FIDUCIARY ADVISOR (CLIENT’S REPRESENTATIVE) ⇒   INVESTMENT PRODUCT PROVIDERS.  In essence, the fiduciary “steps into the shoes” of the client and adopts the client’s ends as his or her own. See , e.g., Arthur Laby, The Fiduciary Obligation as the Adoption of Ends, 56 Buff. L. Rev. 99, 104-29 (2008) (stating that the signature obligation of fiduciary is to adopt ends of his or her principal). The fiduciary acts as the representative of the purchaser, and the best interests of the client must remain paramount to the interests of the fiduciary (excepting only agreed-to-in-advance reasonable compensation) and to that of the product manufacturer.


Under state common law, as Professor Laby further notes, “Historically, providing advice has given rise to a fiduciary duty owed to the recipient of the advice. Both the Restatement (First) and Restatement (Second) of Torts state, “[a] fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation” [citing Restatement (Second) Of Torts § 874 cmt. a (1979) (citation omitted) (emphasis added); Restatement (First) Of Torts § 874 cmt. a (1939) (citation omitted) (emphasis added)].”
But what about the Investment Advisers Act of 1940? Does the Advisers Act modify state common law? No. It has long be recognized that the Advisers Act (unlike ERISA) does not preempt the application of state common law. In other words, the SEC may establish a floor, as to the limits of the fiduciary standard of conduct, but it does not set the ceiling.
Indeed, the basis for holding registered representatives to a fiduciary standard of conduct, under state common law, is through application of fiduciary duties under state common law. This “common law” has been developed over the centuries and may be thought of as “judge-made law.” Throughout nearly all of the United States (except Louisiana, a “civil law” and not a “common law” jurisdiction), the obligations of parties to each other in a commercial relationship are often determined by reference to principles of law, as applied through the centuries, looking at cases decided in the United States of America and, before then, to cases decided in England.


The view that one holding out as an advisor should be governed by the fiduciary standard of conduct finds recent support in academic literature: “The relationship between a customer and the financial practitioner should govern the nature of their mutual ethical obligations. Where the fundamental nature of the relationship is one in which customer depends on the practitioner to craft solutions for the customer’s financial problems, the ethical standard should be a fiduciary one that the advice is in the best interest of the customer. To do otherwise – to give biased advice with the aura of advice in the customer’s best interest – is fraud. This standard should apply regardless of whether the advice givers call themselves advisors, advisers, brokers, consultants, managers or planners.” James J. Angel, Ph.D., CFA and Douglas McCabe Ph.D., “Ethical Standards for Stockbrokers: Fiduciary or Suitability?” (Sept. 30, 2010). Available at

Professor Arthur Laby has also opined on this issue, stating: “If a broker holds itself out as an adviser and suggests it is seeking a long-term relationship with the customer, a fiduciary duty imposed on the broker would be broader in scope than the broker’s current obligation.” 

I do not suggest, however, that all service provider-customer relationships arise to the level of a fiduciary relationship. A plumber may provide some aspect of advice, but the consumer is still in an arms-length relationship with the client. But the delivery of personalized investment advice is quite different from the situation involving the fixing of a leaky pipe. Indeed, public policy considerations come into play as to when fiduciary duties are applied in various service provider-consumer relationships. In the context of personalized investment advice regarding securities, the public policy considerations are substantial – neigh, overwhelming, as to why fiduciary status should be imposed. Please refer to my prior blog post on this topic, located at


Can you be both a fiduciary and a non-fiduciary, with respect to the same client / customer, at the same time? No. Dual registration (i.e., registration as both an investment adviser and a registered representative) does not confer upon one the ability, under state common law, to wear “two hats” at the same time.

It must be first understood that fiduciary duties attach to the relationship. “Fiduciary” is, in effect, a “status” that arises from a variety of factors under state common law. It flows from the establishment of a relationship of trust and confidence with the client. And, as a general rule, the fiduciary obligations extend to the entirety of the relationship.

Time and again our courts have enumerated the fiduciary maxim: “No man can serve two masters.” See, e.g., Carter v. Harris, 25 Va. 199; 1826 Va. LEXIS 26; 4 Rand. 199 (Va. 826), stating: “It is well settled as a general principle, that trustees, agents, auctioneers, and all persons acting in a confidential character, are disqualified from purchasing. The characters of buyer and seller are incompatible, and cannot safely be exercised by the same person. Emptor emit quam minimo potest; venditor vendit quam maximo potest. The disqualification rests, as was strongly observed in the case of the York Buildings Company v. M'Kenzie, 8 Bro. Parl. Cas. 63, on no other than that principle which dictates that a person cannot be both judge and party. No man can serve two masters. He that it interested with the interests of others, cannot be allowed to make the business an object of interest to himself; for, the frailty of our nature is such, that the power will too readily beget the inclination to serve our own interests at the expense of those who have trusted us.” Id. at 204.

The observation that a person cannot wear two hats and continue to adhere to his or her fiduciary duties was echoed early on by the U.S. Supreme Court, “The two characters of buyer and seller are inconsistent: Emptor emit quam minimo potest, venditor vendit quam maximo potest.” Wormley v. Wormley, 21 U.S. 421; 5 L. Ed. 651; 1823 U.S. LEXIS 290; 8 Wheat. 421 (1823). See also Michoud v. Girod, 45 U.S. 503; 11 L. Ed. 1076; 1846 U.S. LEXIS 412; 4 HOW 503 (1846) (“[I}f persons having a confidential character were permitted to avail themselves of any knowledge acquired in that capacity, they might be induced to conceal their information, and not to exercise it for the benefit of the persons relying upon their integrity. The characters are inconsistent. Emptor emit quam minimo potest, venditor vendit quam maximo potest.”]

Why should an advisor not attempt to wear two hats? Simply put, because persons are weak. We are unable to not have our advice be affected by temptations (such as for additional compensation) which might exist. As the U.S. Supreme Court opined, “the rule … includes within its purpose the removal of any temptation to violate them….” SEC v. Capital Gains Research Bureau, 375 U.S. 180; 84 S. Ct. 275; 11 L. Ed. 2d 237; 1963 U.S. LEXIS 2446 (1963) (“This Court, in discussing conflicts of interest, has said: ‘The reason of the rule inhibiting a party who occupies confidential and fiduciary relations toward another from assuming antagonistic positions to his principal in matters involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is justified in a recognition of the authoritative declaration that no man can serve two masters; and considering that human nature must be dealt with, the rule does not stop with actual violations of such trust relations, but includes within its purpose the removal of any temptation to violate them … In Hazelton v. Sheckells, 202 U.S. 71, 79, we said: ‘The objection . . . rests in their tendency, not in what was done in the particular case. . . . The court will not inquire what was done. If that should be improper it probably would be hidden and would not appear.’ United States v. Mississippi Valley Co., 364 U.S. 520, 550, n. 14.” Id. at p. 249 (fn.50).


As a result of regulatory missteps by the SEC (and FINRA) over many decades, substantial consumer confusion now abounds as to the standard of conduct consumers can expect from their providers of investment advice.  Section 913 of the Dodd-Frank Act provides the SEC with the legal authority to correct this situation through the imposition of fiduciary standards upon broker-dealers. Aside from the fact that fiduciary status already attaches to the majority of broker-customer relationships under state common law (which I will write about in later blog posts), permit me to focus on actions by the SEC, and their ill-advised reversal of position regarding the use of titles over the nearly eight decades of the SEC’s existence.

Very early on the SEC took a hard line on representations made by brokers. In its 1940 Annual Report, the U.S. Securities and Exchange Commission noted: “If the transaction is in reality an arm's-length transaction between the securities house and its customer, then the securities house is not subject' to 'fiduciary duty. However, the necessity for a transaction to be really at arm's-length in order to escape fiduciary obligations, has been well stated by the United States. Court of Appeals for the District of Columbia in a recently decided case: ‘[T]he old line should be held fast which marks off the obligation of confidence and conscience from the temptation induced by self-interest.  He who would deal at arm's length must stand at arm's length.  And he must do so openly as an adversary, not disguised as confidant and protector.  He cannot commingle his trusteeship with merchandizing on his own account…’”  [Emphasis added.] Seventh Annual Report of the Securities and Exchange Commission, Fiscal Year Ended June 30, 1941, at p. 158, citing Earll v. Picken (1940) 113 F. 2d 150.

In its 1963 comprehensive report on the securities industry, the SEC also stated that it had “held that where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [BD advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers in situations where such reliance is not merited, and obscuring the merchandising aspects of the retail securities business … Where the relationship between the customer and broker is such that the former relies in whole or in part on the advice and recommendations of the latter, the salesman is, in effect, an investment adviser, and some of the aspects of a fiduciary relationship arise between the parties.”. [Emphasis added.] 1963 SEC Study, citing various SEC Releases.

Yet, and despite the substantial authority already existing (under previous SEC pronouncements, as well as case law), in 2005 the SEC, in the ill-fated “Merrill Lynch Rule” final rule (subsequently overturned by the courts on other grounds), declined to police the use of titles by non-fiduciaries.  The SEC stated, in its 2005 issuing release:

“[W]e share the concern that there is confusion about the differences between broker-dealers and investment advisers, and … we believe that some of that confusion may be a result of broker dealer marketing (including the titles broker-dealers use) …

We have decided not to include in rule 202(a)(11)-1 any other limitations on how
a broker-dealer may hold itself out or titles it may employ without complying with the Advisers Act.”

SEC Release No. 34-51523, IA-2376: Certain Broker-Dealers Deemed Not To Be Investment Advisers (Apr. 12, 2005).

I find the SEC’s statement, above, simply astonishing. While acknowledging that a major source of confusion is broker’s use of titles, the SEC abrogated one of its core functions – the prevention of fraud – by declining to address the use of such titles. In essence, the SEC sanctioned fraud.


State common law also reflects the fact that the use of titles such as “advisor” or “planner” (or similar terms) often results in THE imposition of fiduciary status. Several cases are summarized below.

Koehler (1985).  A U.S. District Court in 1985 held that a fiduciary relationship existed in part because of a defendant's status as financial planner to a client.  In Koehler v. Pulvers, 614 F. Supp. 829 (USDC, Cal, 1985) the defendant, CSCC, was primarily in the business of real estate syndication, but also in business under the name Creative Financial Planning.  As stated in the decision, “The developer defendants obtained investment capital from the public by posing as financial planners ... The financial planners typically had a background in either insurance or real estate sales …  As an alleged financial planning company, CSCC, dba Creative Financial Planners, contacted potential investors by conducting Creative Financial Planning seminars open to the public. Utilizing a slick presentation… CSCC attempted to lure investment capital out of savings accounts, home equity, insurance policies, and other conservative investment vehicles and into the speculative real estate ventures it controlled … At the seminars, CSCC offered to draft a ‘Coordinated Financial Plan’ for attendees at little or no charge. Individuals who accepted this offer received recommendations to purchase limited partnership or trust deed interests in CSCC controlled partnerships and project ....” The court also noted, “Most of the plaintiffs are and were unsophisticated investors. Few had a preexisting relationship with the developer defendants at the time they purchased their securities ... [the investors] relied upon the misrepresentations discussed in detail below. This reliance was reasonable in part because of the developer defendants' purported disinterested financial planner status.”
Cunningham (1990).  Insurance agents who introduced themselves as “investment counselors or enrollers” and who tailored retirement plans for each person depending on the individual’s financial position, and who led the customers to believe that an investment plan was being drafted for each customer according to each customer’s needs, was held by a federal court, apply Iowa state common law, to lead to the possible imposition of fiduciary status.  Cunningham vs. PLI Life Insurance Company, 42 F.Supp.2d 872 (1990).

Mathias (2002). “In the fall of 1985, plaintiff, having recently divorced and relocated to Columbus, Ohio, sought investment advice from Thomas J. Rosser. At the time, Rosser was a licensed salesman for Great Lakes Securities Company and held himself out as a financial advisor … [T]he evidence established that Rosser was a licensed stockbroker and held himself out as a financial advisor, and that plaintiff was an unsophisticated investor who sought investment advice from Rosser precisely because of his alleged expertise as a broker and investment advisor. Further, Rosser testified that plaintiff had relied upon his experience, knowledge, and expertise in seeking his advice. Therefore, we conclude that plaintiff presented sufficient evidence to establish that she and Rosser were in a fiduciary relationship.”  Mathias v. Rosser, 2002 OH 2531 (OHCA, 2002).  The court further noted, that under Ohio law, a fiduciary relationship is “a relationship in which one party to the relationship places a special confidence and trust in the integrity and fidelity of the other party to the relationship, and there is a resulting position of superiority or influence, acquired by virtue of the special trust.” Id.

Williams (2006).  In a case arising from Oregon, a self-employed insurance seller and licensed financial planner took advantage of his position as a financial advisor to gain the trust of an 87-year-old man, Stubbs, convincing the elderly man to grant him a power of attorney, with which the financial planner stole about $400,000.  The court held that the licensed financial planner was employed as a fiduciary, specifically noting that the elderly man relied upon the fiduciary as a financial advisor and estate planner.  U.S. v. Williams, 441 F.3d 716, 724 (9th Cir. 2006).

Hatleberg (2005).  When a bank held out as either an “investment planner,” “financial planner,” or “financial advisor,” the Wisconsin Supreme Court held that a fiduciary duty may arise in such circumstances. Hatleberg v. Norwest Bank Wisconsin, 2005 WI 109, 700 N.W.2d 15 (WI, 2005).

Graben (2007).  A dual registrant crossed the line in "holding out" as a financial advisor, and in stating that ongoing advice would be provided, and other representations, and in so doing the dual registrant, who sold a variable annuity, and was found to have formed a relationship of trust and confidence with the customers to which fiduciary status attached. "Obviously, when a person such as Hutton is acting as a financial advisor, that role extends well beyond a simple arms'-length business transaction. An unsophisticated investor is necessarily entrusting his funds to one who is representing that he will place the funds in a suitable investment and manage the funds appropriately for the benefit of his investor/entrustor. The relationship goes well beyond a traditional arms'-length business transaction that provides 'mutual benefit' for both parties." Western Reserve Life Assurance Company of Ohio vs. Graben, No. 2-05-328-CV (Tex. App. 6/28/2007) (Tex. App., 2007).


If we are going to protect the consumers of personalized investment advice (which should be the primary goal of any action to be undertaken by our regulatory agencies), then we should take action. We simply desire us all to: “Say what you do; do what you say.”

If a person uses a title denoting a relationship of trust and confidence – i.e., a fiduciary relationship – without accepting at all times the fiduciary duties which flow therefrom, that person should be held to account. The use of such a title in such instances is a misrepresentation – i.e., designed to mislead the consumer. And the use of such title is intentional – i.e., it is designed to result in a commercial advantage to the user of the title. There is another name for “intentional misrepresentation” under the law – “fraud.”

I thank Dalbar’s CEO Lou Harvey, journalist Gil Weinrich, and TD Ameritrade Trust Company’s President Skip Schweiss for calling attention to this issue. And today, at the fi360 Annual Conference, Skip Schweiss issued a challenge – that firms and the media stop using the term “advisor” except when the person involved is registered as, and acting as, an investment adviser.

Practitioners and members of the media – do not stand idly by and let fraud go unnoticed and unchecked - TAKE ACTION. Fraud should not be tolerated. Call attention to these untruths. How?
  • Write to the firm or registered representative to express your concerns.
  • Write to the SEC (such as by posting a comment to the SEC's web site in connection with its request for comment on fiduciary rule-making - it's easy to do via,%20Dealers,%20and%20Investment%20Advisers.
  • Write to your state securities administrator - and point out the fraud.
  • Write to your state's Attorney General - and point out the fraud.
  • Practitioners - if you see members of the media utilize the term "advisor" to describe someone other than a fiduciary advisor - correct them!
  • Members of the media - please take care to describe actors in the securities industry correctly.

It is time to hold those who hold themselves out as “advisors” – or by similar names (“financial advisor,” “financial consultant,” “wealth manager,” etc.) – to the fiduciary standard of conduct. Or, as Lou Harvey suggested, we should demand our federal and state securities regulators, and states attorney general, and other agencies, to take action to stop this persistent and pervasive fraud. Only by taking collective action can we, together, restore the trust of the consumer in those who choose to utilize the term "advisor" and adhere to their fiduciary obligations.

If you’ve read this far, thanks for the read. As always, please follow me on Twitter (@140ltd) or connect with me on LinkedIn, to receive word of new posts to this blog, in the crucial months ahead. Thank you – Ron.

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