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SEC Proposal 34-83063: The Relationship Summary Disclosure

Earlier this week, I evaluated the new SEC Proposal 34-83062, which created a new “best interest” standard for brokerage firms which is clearly does NOT hold brokerage firms to anything remotely like that if you dig into the weeds.

This is an analysis of the next SEC Proposal: 34-83063, and yes, it is long, but I assume you’re probably interested, and that you’d rather read 25 pages than more than 400.

The focus here is a lengthy description of new required disclosures of both RIAs and broker-dealer reps and sales agents.  It is altogether the longest of the three proposals at 470 pages, and just about all of it relates to one new document that the SEC is proposing that you deliver to prospects and clients: the relationship summary.   

The goal behind requiring this new document, when you push aside all the excess verbiage, is stated fairly clearly on pages 12-13:

“We agree that it is important to ensure that retail investors receive the information they need to understand the services, fees, conflicts, and disciplinary history of firms and financial professionals they are considering. Likewise, we believe that we should reduce the risk that retail investors could be confused or misled about the financial services they will receive as a result of the titles that firms and financial professionals use, and mitigate potential harm to investors as a result of that confusion. We also believe the information should be reasonably concise. Accordingly, we are proposing new rules to require broker-dealers and investment advisers to deliver to retail investors a customer or client relationship summary (“Form CRS”) that would explain general information about each of these topics.

Second, we are proposing rules that would (i) restrict the use of the terms“adviser”and “advisor” by broker-dealers and their associated financial professionals, and (ii) require broker-dealers and investment advisers to disclose in retail investor communications the firm’s registration status while also requiring their associated financial professionals to disclose their association with such firm.”

The Form CRS would be four pages or shorter, written in clear, concise language with no fine print, and contain several sections:

(i) introduction;

(ii) the relationships and services the firm offers to retail investors;

(iii) the standard of conduct applicable to those services;

(iv) the fees and costs that retail investors will pay;

(v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers);

(vi) conflicts of interest;

(vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and

(viii) key questions for retail investors to ask the firm’s financial professional. (page 14, 22 and several times thereafter)

The SEC tells us in a footnote (page 14) that, under the Proposal, Form ADV would be amended to include a new Part 3, Form CRS, which would be kept current and on file at the SEC.  The text tells us on page 16 that

“while firms will be required to include firm-specific information in Form CRS, they will have limited discretion in the scope and presentation of that information.”

Specifically, from pages 23-24:

1) the SEC will specify much of the content and presentation of Form CRS in the form’s instructions (page 23);

2) that firms may not include disclosure in the relationship summary other than disclosure that is required or permitted by the Instructions (page 23);

3) All information in the relationship summary must be true and not omit any material facts;

4) The SEC will standardize the summaries by specifying the headings, sequence and content of the topic, prescribing language for firms to use as applicable.

Specific Contents: Introduction

If you’re beginning to suspect that the SEC plans to helpfully write your relationship summary for you, you’re more than halfway correct.  On page 33, the Proposal starts by defining and describing the “Introduction”—which would have a title that the SEC has already written for you (mostly):

“We are proposing that the beginning of the relationship summary contain a title highlighting the types of investment services and accounts the firm offers to retail investors, specifically “Which Type of Account is Right for You – Brokerage, Investment Advisory or Both?” for dual registrants and “Is a[n] [Brokerage/Investment Advisory] Account Right for You?” for standalone brokerage firms or investment advisory firms, respectively.” (emphasis added for clarity)

In this section, you would also insert your firm’s name, whether you’re registered with the SEC, the date of the relationship summary, and an “introductory paragraph” which would explain the types of accounts (Brokerage accounts?  Investment advisory accounts?) that your firm offers. 

The SEC doesn’t trust you to write this on your own, however.  On page 34, it states that every firm would be required to state:

“There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.”

The broker-dealer would be required to state:

“We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services.”

Advisors, meanwhile, would use different required language:

“We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services.”

Dual registrants would have this to say:

“Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time.”

Finally, all firms would be required to include:

“This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information.”

Relationships and Services

On page 36, we move on to “Relationships and Services,” which happens to be the prescribed heading for the next section of your relationship summary.  (Dual registrants would instead use “Types of Relationships and Services: Our accounts and services fall into two categories.”) The goal here, we are told, is to discuss the nature, scope and duration of services, specific types of accounts and services the firm offers, how often you offer investment advice and whether you monitor the account. 

Broker-dealers would be required to use exactly this wording, and the bold-face emphasis here is an actual part of the Proposal and would be required in the final relationship summary document:

“If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment.” (emphasis in the original)  (page 37)

On page 38, we find a very cleverly disguised big win for the brokerage world. 

“broker-dealers that offer accounts in which they offer recommendations to retail investors would state that the retail investor may select investments or the broker-dealer may recommend investments for the retail investor’s account, but that the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.”

One wonders whether the SEC authors realize that, with this required provision, brokerage firms and sales agents are REQUIRED to disclaim away any consequences of terrible, self-serving advice.  Imagine that the “financial planner” who works at one of the wirehouses sells an annuity with a fat commission instead of an actual investment, and the case is taken to arbitration.  In the past, there might have been some question whether the customer realized that the recommendation was a sales pitch.  Now all the broker has to do is point to the routine disclosure in the relationship summary document that the customer received, and the customer has no leg to stand on.

I should repeat: this requirement, without further explanation that the sales agent’s recommendation may actually be nothing more than a sales pitch, gives brokerage firms and their lawyers virtual immunity from redress for inappropriate or self-serving recommendations.

Brokers and sales agents are also required to disclose if they offer performance monitoring of brokerage accounts and whether there will be an extra fee for that, to describe any regular communications they have with retail investors (i.e. account statements), and a disclosure if their brokers are only allowed to recommend investments that were manufactured in-house or pay sly revenue-sharing fees for shelf space:

“We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.” (page 39)

Page 39 and 40 discuss how some firms may only offer proprietary funds and some of the potential harm that limiting the types of investments would have for retail consumers who trust their broker’s advice.  But for some reason these dangers and caveats are not required to be disclosed alongside the bald statement that the firm has chosen to limit its investment options for self-serving purposes.  This too, would seem to be a big win for the brokerage firms.

Advisors have a little more flexibility in their Relationships and Services section.  The disclosure would state the types of fees they charge (AUM, fixed fee, hourly, all of the above, as taken from their Form ADV) and how frequently this fee is assessed.  It would say the advisory firm offers advice on a regular basis—or, if not, how frequently this advice is offered.  And there would be a list of other services offered: helping develop the retail investor’s investment strategy, frequency of monitoring the investment accounts and frequency of communications (like performance statements).  One imagines that this would be an opportunity to insert a mention of financial planning services as well, but that isn’t discussed.  (Pages 40-41)

On pages 42-43, the Proposal says that advisors would disclose whether they exercise discretion, manage on a non-discretionary basis, or both.  (Use the same definition of “discretionary authority” as in Form ADV; can you purchase and sell on behalf of the client—or not?) 

The statement should also, according to a footnote on page 43, include this terminology: “Our investment advice will cover a limited selection of investments.  Other firms could provide a wider range of choices, some of which might have lower costs.” 

This language seems to have a perverse effect as far as consumer disclosure is concerned.  Basically, the SEC is requiring RIAs to “confess” that they limit their investment choices only to funds, ETFs and high-quality bonds, leaving out non-traded REITs, equity-indexed annuities, hedge funds and derivatives with sketchy counterparties, as if that is somehow a negative vs. the more comprehensive list of investment “opportunities” offered by the brokerage firms.  This is going to look like a consumer warning, when a better warning would be: “We don’t recommended high commission junk or anything we consider to be unsuitable to your financial well-being.” 

Standard of Conduct

The next section of the relationship summary is the standard of conduct, which, we are told on page 50, would have the mandatory headline “Our Obligations to You.  Also mandatory is the next line: “We must abide by certain laws and regulations in our interactions with you.” (Do consumers not know that already?)

For broker-dealers and sales agents, who would fall under the new “best interest” standard in the previous Proposal, the mandatory language would be “We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities.” 

It would go on to say: “When we provide any service to you, we must treat you fairly and comply with a number of specific obligations.” 

Finally, it would say: “Unless we agree otherwise, we are not required to monitor your portfolio or investments on on ongoing basis.  Our interests can conflict with your interests.  When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them.”  (pages 52-53)

This seems to compound the problem in the previous Proposal, of telling consumers that the brokerage firm and sales agents must put the consumer’s interests ahead of their own, without actually requiring this.  It’s a big win for the brokerage industry that this “disclosure” is required reading for their customers, because it would seem to be crafted to enhance trust in, not suspicion of, the motives of the sales agent.

Do advisors get the same gentle treatment?  Page 54 stipulates that the advisory firm would be required to include this different wording in the standard of conduct section of the relationship summary:

“We are held to a fiduciary standard that covers our entire investment advisory relationship with you.” 

If the advisor is providing ongoing advice (rather than, say, a one-time financial plan or investment plan), the statement would then go on to say:

“For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.”

No definition of “fiduciary” is proposed or required, which would seem to open this disclosure up to confusion.  But I also don’t see anything that would prohibit the planning firm from adding its own interpretation of the definition—albeit with the help of an attorney.

After that, the disclosure would be required to include this language (p. 54-55):

“Our interests can conflict with your interests.  We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or  not to agree with them.”

What conflicts are the SEC worried about here?  The fact that the firm is charging consumers, when it could be providing its services for free?  Yes, everybody has conflicts.  But shouldn’t the SEC be providing language which helps consumers understand that there are far more significant conflicts in the brokerage model (like commissions for selling garbage products, incentives to churn accounts and incentive trips and the chance to move higher on the grid if you sell proprietary products) than in the advisor world (none of the above).

The SEC is throwing a bit of shade on fiduciary advisors with the prescribed language in this section—unless advisors have the freedom to add their definition of “fiduciary” and unless or until there is language that discloses the conflicts that the brokerage firm model embraces, that fee-only advisors refuse to accept.

Summary of Fees and Costs

On pages 57-60, the Proposal says that both brokerage and advisory firms should specify the types of fees they charge and in general the amount, rather than a personalized fee disclosure for every customer or client.  The heading would be “Fees and Costs,” and under that you would have to include this language:

“Fees and costs affect the value of your account over time.  Please ask your financial professional to give you personalized information on fees and costs that you will pay.” (page 63)

Dual registrants would include this language on their relationship summary:

“Transaction-based fees.  You will pay us a fee every time you buy or sell an investment.  This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account.”

Brokerage firms would include this language:

“The fee you pay is based on the specific transaction and not the value of your account.”

Both brokerage firms and dual registrants would then have to add this language:

“With stocks or exchange-traded funds, this fee is usually a separate commission.  With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a “mark-up” or “mark down”).  With mutual funds, this fee (typically called a “load”) reduces the value of your investment.” (emphasis in the original). (page 64)

Brokerage firms would also have to state that some investments impose additional fees that will reduce the value of investments over time—and provide examples like variable annuities and exchange-traded funds, and mutual funds with 12(b)-1 fees.  They would also be required to state that a retail investor could be required to pay outbound fees for certain investments: like the surrender charges on variable annuities.  Also, they would state whether the fees or commissions are negotiable, which would appear to relate to volume discounts.  (pages 65-67) 

This section would also be required to include the following specific disclosure related to the potential for churning, but why not use the word “churning” to make this clear?:

“The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.”

And with respect to brokerage services, this is mandated language:

“From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold investments for longer periods of time.” (page 68)

Dual registrants who charge via AUM would include this prescribed wording:

“Asset-based fees.  You will pay on ongoing fee [at the end of each quarter] based on the value of the cash and investments in your advisory account.”  (The bracketed language would change if the fees are assessed, say, monthly or annually.)  (page 69)

And from page 76:

“An asset-based fee may cost more than a transaction-based fee, but you may prefer an asset-based fee if you want continuing advice or want someone to make investment decisions for you.”

Investment advisors who charge via AUM would use this language:

“The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf.  The asset-based fee reduces the value of your account and will be deducted from your account.”

Advisors who charge other fees would describe how those fees are assessed and the impact they would have on the value of the account.  (page 70)

If your AUM fee covers the transaction costs whenever you buy or sell, the SEC designates this to be a “wrap fee program,” and would require the following additional disclosure:

“We offer advisory account programs called wrap fee programs.  In a wrap fee program, the asset-based fee will include most transaction costs and fees to a broker-dealer or bank that will hold your assets (known as “custody”), and as a result wrap fees are typically higher than non-wrap advisory fees.”  (emphasis in the original)  (page 71)

Later, on page 73 and page 75, the Proposal adds this required language:

“Although transaction fees are usually included in the wrap program fee, sometimes you will pay an additional transaction fee (for investments bought and sold outside the wrap fee program).  Paying for a wrap fee program could cost more than separately paying for advice and for transactions if there are infrequent trades in your account.”

Investment advisors, we are told on page 72, would also have to state that some investments impose additional fees that will reduce the value of the account over time, and provide examples of such investments that the firm offers.   

Are they talking about annuities here?  Apparently so, for in the next sentence, the Proposal says that they should also disclose surrender charges if they recommend variable annuities. 

Meanwhile, advisors would have to include some wording that tells the reader that there are transaction fees paid to the custodian whenever they buy and sell funds or securities.

The investment advisor should state whether its fees “vary and are negotiable,” and describe the factors that would vary the fee (such as, perhaps, the size of the account).  (page 72-73).   And then include the following statement (pages 74-75):

The more assets you have in the advisory account, including cash, the more you will pay us.  We therefore have an incentive to increase the assets in your account in order to increase our fees.  You pay our free [insert frequency of fee] even if you do not buy or sell.”

The section would also invite advisor clients to review additional information in the firm’s Form ADV Part 2 brochure and any brochure supplement that may be available.  Brokerage customers would similarly be invited to look up additional information in BrokerCheck, the firm’s website and the retail investor’s account agreement.  (page 61)

The Proposal does NOT require brokerage or advisory firms to include examples of how fees could affect an investor’s investment returns.  (page 62)

What’s missing here?  If the financial planning firm is using some of the asset-based fees to pay for financial planning, there is no mention or disclosure of the other services that are being received in addition to investment management.  This disclosure regime might accelerate a trend toward planning firms charging separately for their financial planning and non-investment-related advice.


Here’s where it gets interesting.  The next heading (page 89) will depend on your business model.  “Standalone investment advisers” (meaning fee-only or not dually-registered) will use the title “Compare with Typical Brokerage Accounts.”  Broker-dealers and sales agents will use the title “Compare with Typical Advisory Accounts,” and each would provide information about the other.

What?  Investment advisors would be required to use the following prescribed language:

“You could also open a brokerage account with a broker-dealer, where you will pay a transaction-based fee, generally referred to as a commission, when the broker-dealer buys or sells an investment for you.

Features of a typical brokerage account include:

With a broker-dealer, you may select investments or the broker-dealer may recommend investments for your account, but the ultimate decision as to your investment strategy and the purchase and sale of investments will be yours.”

A broker-dealer must act in your best-interest and not place its interests ahead of yours when the broker-dealer recommends an investment or an investment strategy involving securities.  When a broker-dealer recommends any service to you, the broker-dealer must treat you fairly and comply with a number of specific obligations.  Unless you and the broker-dealer agree otherwise, the broker-dealer is not required to monitor your portfolio or investments on an ongoing basis.

If you were to pay a transaction fee in a brokerage account, the more trades in your account, the more fees the broker-dealer charges you.  So it has an incentive to encourage you to trade often.” (emphasis in the original)  (page 90-92)

Advisors would also have to include a table comparing transaction-based fees with ongoing asset-based fees side-by-side.  The prescribed heading is: “You can receive advice in either type of account, but you may prefer paying…”  and then one column would say a transaction-based fee from a cost perspective, if you do not trade often or if you plan to buy and hold investments for longer periods of time.”  The other column would say: an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.” (page 92, emphasis in the original)

The broker-dealers would, meanwhile, have to include, under the aforementioned “Compare with Typical Advisory Accounts” heading:

“Advisers are held to a fiduciary standard that covers the entire relationship.  For example, advisors are required to monitor your portfolio, investment strategy and investments on an ongoing basis.”  (p. 94)

This is, to say the least, a very misleading description of what “fiduciary” means, and would certainly lead consumers to believe that the fiduciary standard means ongoing monitoring, not a higher standard of care.  Is that the SEC’s intent, to obfuscate, in its disclosures, the fact that fiduciary advisors have embraced a higher standard of care?  One would hope not, but it certainly looks that way.

It gets worse.  The next set of disclosures are as follows:

“If you were to pay an asset-based fee in an advisory account, you would pay the fee periodically, even if you do not buy or sell.  You may also choose to work with an investment adviser who provides investment advice for an hourly fee, or provides a financial plan for a one-time fee.  For an adviser that charges an asset-based fee, the more assets you have in an advisory account, including cash, the more you will pay the adviser.  So the adviser has an incentive to increase the assets in your account in order to increase fees.” (p. 94-95)

Increasing a client’s net worth is a CONFLICT OF INTEREST??  Based on that criteria, knowing what I know about many advisors and what they’ve done for their clients over the years, the reader of this disclosure is advised to lock your doors and windows.  And it should be noted that commissions are higher for larger sales, but where is THAT disclosed in this relationship summary?

Brokerage firms and sales agents would be required to include the same tabular chart outlined above in the adviser disclosure language.

I found it interesting that the SEC seems to assume that only advisors provide financial plans to clients, and therefore the possibility is only included in the broker-dealer disclosure.  But as I read the two disclosures, imagining that I’m a naive investor, I think the brokerage option—purely from the SEC’s disclosure language—looks like the more attractive one. 

How would I change it?  I’d provide a MUCH clear explanation of what it means to be a fiduciary: “being a fiduciary means, among other things, that the advisor has an obligation to put your interests ahead of your own and the firm’s, which obligation is a higher standard than the ‘best interest’ standard imposed on broker-dealers and sales agents.  And the advisor who is not registered with a broker-dealer has renounced the conflict of interest represented by sales commissions where investment companies pay (often generously) the broker-dealer and its representatives to sell its products.  You may also receive valuable financial planning or non-investment-related advice as part of the services paid for by your asset-based fee.”

Something like that…

Conflicts of Interest

By now, you’re probably thinking, how helpful of the SEC to write my relationship summary for me.  In this section, the SEC will help you disclose your conflicts of interest to prospective clients, but instead of dictating the language, it only outlines the types of things you need to disclose.  On page 105 we are told that every type of business model would use the heading “Conflicts of Interest.”

Broker-dealers would use the following prescribed language, from page 105:

“We benefit from our recommendations to you.”

Advisors would say, instead:

“We benefit from the advisory services we provide you.”

Dual-registrants would have different language:

“We benefit from the services we provide you.”

The Proposal notes (page 103) that investment advisors already report conflicts of interest in Form ADV Part 2.  Most of the rest of the disclosure focuses on broker-dealer conflicts, and there are more than a few listed:

Proprietary investments;

Third party compensation to recommend or sell certain investments (and revenue-sharing arrangements, and payments for “distribution support”);

Differential commissions and trails from different fund share classes;

Principal trading, buying investments from a retail investor or dumping unwanted securities from its account into customer portfolios.  (pages 104-110)

In each case, the disclosure would have to provide examples of the types of investments associated with each of the conflicts (i.e., mutual funds and/or variable annuities; no mention of separately-managed accounts).

Additional Information

Finally, the relationship summary would include what appears to be a catchall section, which would be titled “Additional Information.”  All business models would follow the title with the sentence: “We encourage you to seek out additional information.”

What information?

“Firms would be required to state whether or not they or their financial professionals… are currently required to disclose certain legal or disciplinary events to the Commission, self-regulatory organizations, state securities regulators or other jurisdictions as applicable.” (page 115)

Advisors and broker-dealers would state: “We have legal and disciplinary events,” if they do, and list (for advisors) disciplinary information disclosed in Item 11 of Part 1A or Item 9 of Part 2A of Form ADV, or (for broker-dealers) legal or disciplinary events per Items 11 A-K of Form BD.  A footnote on page 117 (footnote number 279) lays out the various types of charges: felony convictions, misdemeanor convictions, CFTC findings or other regulatory actions, foreign financial regulatory authority findings, SRO disciplinary actions, revocations or suspensions, and unsatisfied judgments or liens. 

But here’s the catch; the broker-dealer (and, of course, advisor) can provide only SUMMARIES of these breaches—and we aren’t told exactly how detailed these summaries have to be.  From page 119:

“We believe that for many firms, requiring additional information would include too much detail for short summary disclosure, and updating these details in the relationship summary on an ongoing basis would add significant costs without compensating benefit…. We believe that requiring an affirmative statement that the firm and its financial professionals have reportable legal or disciplinary events… will flag this important issue for retail investors and help them to determine whether they want additional information in other disclosures.”

If I was asked to change one thing about this Proposal, this would be it: I would want the SEC to specify that each breach should be listed, along with at least the nature of the offense.  Maybe that’s what the SEC has in mind, but let’s make that clear if it is.

Every firm would also have to include this language, whether or not they had to disclose regulatory issues: “Visit for a free and simple search tool to research our firm and our financial professionals.  To report a problem to the SEC, visit or call the SEC’s toll-free investor assistance line at 800-732-0330.  [To report a problem to FINRA…]. If you have a problem with your investments, account or financial professional, contact us in writing at [insert your business address].” (page 120)

I’m not sure why the FINRA contact information is left out, but advisors would use the SEC contact information, while brokerage firms would list the FINRA information.  Broker-dealers would be required to direct retail investors to BrokerCheck (, their firm websites and the retail investor’s account agreement.  Advisors would direct investors to additional information in the firm’s ADV Part 2 brochure and any relevant supplements.

Key Questions

That’s it for the disclosures, but the SEC isn’t finished yet.  The Proposal also wants the relationship summary to include “key questions” that any prospective client of either a brokerage firm or advisory firm should ponder before signing on the dotted line.  On page 126, we’re told that “the intent is to encourage retail investors to have conversations with their financial professionals about how the firm’s services, fees, conflicts and disciplinary events affect them.”

The SEC will require the title to be: “Ask your financial professionals these key questions about our investment services and accounts.”

Here is the required wording of the questions (pages 127-128)

1. Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account?

2. Do the math for me. How much would I pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees?

3. What additional costs should I expect in connection with my account?

4. Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments?

5. What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account.

6. How will you choose investments to recommend for my account?

7. How often will you monitor my account’s performance and offer investment advice?

8. Do you or your firm have a disciplinary history? For what type of conduct?

9. What is your relevant experience, including your licenses, education, and other qualifications? Please explain what the abbreviations in your licenses are and what they mean.

10. Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a broker-dealer? What can you tell me

about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to?

This is followed by a very interesting sentence (page 128):

“We are proposing to allow firms to modify or omit portions of these questions, as applicable to their business.  We are also proposing to require a standalone broker-dealer and a standalone investment adviser to modify the questions to reflect the type of account they offer to retail investors.  In addition, we are proposing that firms could include any other frequently asked questions they receive following these questions.  Firms would not, however, be permitted to exceed fourteen questions in total in order to limit the length of the relationship summary.”

It’s uncertain how much leeway this gives you, but you can be sure the brokerage firm legal teams will be formally petitioning the SEC with their own versions of these questions, while retail advisors may not have the legal horsepower to make their own modifications and get them approved.

Other Issues

At the end of each section, the SEC includes questions that people filing comment letters might be inclined to answer, and when you get to the bottom of these for this section, you wind upon page 133 of a 470 page document.  What’s the rest of it about?  Aren’t we finished?

In a way, yes.  The Proposal tells us that firms would be required to file their updated relationship summary with the SEC.  Broker-dealers’ relationship summaries would be filed in text-searchable format with EDGAR, while advisors would file theirs through IARD just like they file Form ADV.  Dually-registered firms would file on both.  (pages 136-137) 

The relationship summary would be delivered to each investor before or at the time the retail investor first engages the firm’s services.  (page 138) 

There are brief mentions of “robo advisers” and how they would deliver this document on the website to a client to electronically sign before an account is created in the client’s name (page 145). 

The relationship summary would be required as of six months after the effective date of the Proposal as ratified.  (pages 157-158)   

Broker-dealers and their representatives are prohibited from calling themselves “advisors” or “advisors,” or using the term in their title (i.e. “investment advisor” or “financial advisor”).  (Pages 164-176  and particularly from page 171 through 176)  I thought this was a great indication that at least some consumer lobbying is being heard in the halls of the SEC; from page 167:

“one commenter examined the websites of nine different brokerage firms and found that the firms’ advertising presents the image that the firms are acting in a fiduciary capacity, with many firm advertisements continuing to present the firm as providing all-encompassing advice, with no differentiation between the firms’ investment adviser services and brokerage services.”  Was the SEC not aware of this before?

And the legal challenges to the DOL Rule, where brokerage firms claimed that they were exempt from fiduciary obligations because they were, in reality, in the sales business seems to have impacted the SEC’s thinking.  From page 168:

“one commenter stated that “[t]he problem is that investors are being misled into relying on biased sales recommendations as if they were objective, best interest advice and are suffering significant financial harm as a result.”  The commenter noted that “these titles and marketing materials are misleading” [if] … broker-dealers truly are the “mere salespeople they’ve claimed to be in their legal challenge to the DOL fiduciary rule.””

If you’re looking for the specific prohibition, here it is, on page 172:

“the proposed rule would restrict a broker-dealer’s or its associated natural persons’ use of the term “adviser” or “advisor” as part of a name or title when communicating with a retail investor in particular circumstances. This would include names or titles which include, in whole or in part, the term “adviser” or “advisor” such as financial advisor (or adviser), wealth advisor (or adviser), trusted advisor (or adviser), and advisory (e.g., “Sample Firm Advisory”) when communicating with any retail investor.”

The next page explains that the SEC considered whether to also restrict terms like “financial consultant” (the terms “financial planner” and “wealth manager” are not mentioned), but apparently didn’t feel like it had the authority.  Unlike those other professional monikers, “the term “investment adviser”… is a defined term under the Advisers Act as any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities.”

What about dually-registered advisors—also referred here, interestingly enough as “Dual-Hatted Financial Professionals?”  SEC-registered or state-registered firms and broker-dealers are permitted to use the term “advisor” (or “adviser”) in their titles, but only where that person provides investment advice.  There’s a discussion about that, but the gist of it seems to be summarized on page 177:

“we believe that a financial professional who does not provide investment advice to retail investors on behalf of the investment adviser, i.e., a financial professional that only offers brokerage services to retail investors, should be restricted from using the title “adviser” or “advisor” despite such person’s association with a dually registered firm.”

This, of course, is a giant loophole; the very name “dual-hatted financial professional” describes a sales format where somebody serves in an impartial “advisor” role right up to the time when that person takes off the “advisor” hat and becomes a salesperson.  As many have said before me, if there were actual hats involved, there might be fair disclosure, but in fact the line between when an advisor is crafting a financial plan, and when that person is recommending that the investment portfolio be entirely populated with non-traded REITs, is not visible to the consumer.

The FSI must be cheering.

I found it interesting that the SEC considered, in the drafting of this Proposal, requiring any broker-dealer that uses the terms “advisor” or “adviser” to simply register with the SEC (pages 180-181), ending its curious interpretation of the “solely incidental” rule when brokerage firms are clearly holding themselves out as primarily offering advice.

In that same vein, firms (as we’ve already seen) must disclose to consumers whether they are registered as a broker-dealer or an investment advisor (pages 193-197). 

The language for advisors in their print communications would be:

“[Name of Firm], an investment adviser registered with the Securities and Exchange Commission”


“[Name of Firm], an investment adviser registered with the Securities and Exchange Commission”

Dually-registered firms would use this disclosure:

“[Name of Firm], an investment adviser registered with the Securities and Exchange Commission”

And broker-dealer reps would use this disclosure on the business card or signature block:

“[Name of Firm], an investment adviser registered with the Securities and Exchange Commission”


“[Name of Firm], an investment adviser registered with the Securities and Exchange Commission”

Or in some cases:

“[Name of professional], a [title] of [Name of Firm], an associated person of an SEC-registered broker-dealer and a supervised person of an SEC-registered investment adviser.”  (pages 194-195)

Economic Analysis

From there, we move into the analysis of the economic impact of these proposed rules for a new relationship summary document, and a tedious reiteration of the reasoning behind requiring it—and each section of it.  There’s a lot of discussion about how confused the public is about the roles that different business models play in providing financial guidance, and the standards they are held to, but chances are you know more, yourself, than the SEC does about that.  A quote on page 254 stands out as an acknowledgement of what you’ve been thinking throughout this summary:

“we acknowledge that standardization of disclosures not only limits personalization that may be valuable to retail investors but also could result in disclosures that are less precise.”

Among the potential costs, the SEC recognizes that brokers and firms with bad disciplinary records will see decreased business as a result of the disclosures, but curiously, the Proposal authors worry that some consumers might unnecessarily avoid the bad actors:

“One potential cost of the increased salience of the existence of disciplinary events may be that retail investors could be deterred from hiring a firm or financial professional with a disciplinary record, even if they would be better off to do so, without further investigating the nature of the disciplinary event. Alternatively, an investor may also incorrectly assume that a firm that does not report legal/disciplinary history is a “better” or a “more compliant” firm than a firm that does report such history; i.e., the lack of currently reportable disciplinary history could signify a stamp of approval for some investors. Therefore, disclosures of the existence of disciplinary events could have an unintended consequence of keeping some investors out of the market for financial advice or by selecting financial professionals that could lead to a mismatch with the expectations of the retail investor.” (page 262)

You might also be wondering: what other costs could we be talking about, since the relationship summary is just four pages long, and the SEC has helpfully written pretty much all of it for you?  Well, on pages 275-276, the SEC estimates that it will costs advisory firms between $1,300 and $3,400 to create their initial relationship summary; add in the cost of delivery (?) and the report says it will cost $5,350 per advisory firm, or $43.4 million to the advisory community as a whole. 

BD’s, meanwhile, are expected spend $42,500 to create their relationship summaries, and the aggregate cost would be $121.5 million.

Beyond that, firms with no regulatory history to disclose will benefit against firms that have regulatory dings in the relationship summary (page 277), and the Proposal notes that 84% of 366 dual-registered broker-dealers and 47% of standalone broker-dealers have at least one disclosed disciplinary action.  Just 14% of standalone investment advisors have a disclosed disciplinary action.  (page 280-281)

In general, broker-dealers and investment advisors would be more competitive with each other in the marketplace, due to greater understanding by retail investors (page 278) which might result in reduced pricing power (page 279).

The Proposal says that allowing firms to write their own customized relationship summaries was considered, but this would be more costly on the various industries and market participants, and make it harder for consumers to conduct their online searches.  (page 286)

There’s a long and largely redundant section discussing brokers being restricted from using the term “advisor” or “advisor” and firms disclosing whether they’re registered with the SEC as advisors or brokerage firms, and no actual dollar conclusion as to how much this would cost or benefit brokerage or advisory firms.  And there’s nearly a hundred pages of analysis on how the Proposal fits under the Paperwork Reduction Act, which seems kind of ironic.  And, if anybody is interested, a more detailed summary of the estimated costs, which seem to me to have been pulled out of thin air.

Summary and analysis

I’m going to go out on a limb here and suggest that brokerage firm lobbyists had a heavy hand in drafting the language of this relationship summary thing.  In particular, the wording in the “Relationships and Services” section gives brokerage firms language they can point to in any arbitration hearing: it was clearly disclosed right there in the relationship summary that our sales agents were merely making suggestions, and it was totally the decision of the consumer to buy those equity-indexed annuities with 15-year surrender charges. 

And requiring RIAs to disclose, with no additional explanatory language, that they have limited the investment options they recommend makes it sound like this is a bad thing that the public needs to be warned about.  Not recommending hedge funds, non-traded REITS, high-commission annuities and C share mutual funds is a benefit, not an area of concern, to consumers.

Also, there might be room to squeeze in a disclosure that the ongoing fees cover more than just the investment management; they also pay for financial planning and other services.  But most of the disclosures make it appear that all of the fees are being directed toward handling the portfolio.  I think this will motivate advisors and planners to bifurcate their fees, allocating a portion to asset management, with fixed quarterly fees for the financial planning.  Added bonus: By only including the fees related to asset management in the disclosure document, the firm would look more competitive with the brokerage competition.

I also think, in the Standard of Conduct section, that the brokerage firm disclosure (“We must act in your best interest…”) is so misleading that it borders on securities fraud, even with (or, perhaps, ESPECIALLY with) the changes proposed in 34-83062). The problem is compounded when advisors are forced to disclose that they will act as fiduciaries, but are not allowed to explain that this is a higher standard than the brokerage firms are held to.

Finally, both broker-dealers and advisors, indiscriminately, must disclose that they have conflicts of interest—but the language doesn’t help the consumer understand that the degree of conflict (including incentives to churn, recommend unsuitable investments and sell high-commission products) is much higher for the broker and sales agent than for the fiduciary advisor.

The “Comparisons” section requires you to define “fiduciary” in a totally-misleading way, implying that it means monitoring the portfolio and delivering an investment strategy.  Overall, the SEC seemed to back away from making “fiduciary” a significant differentiator in these disclosures.

In these areas, the brokerage firm lobbyists scored big wins over what appears to be a somewhat feckless SEC staff.

I love the fact that firms (brokerage and advisory) would be required to disclose their legal and regulatory (disciplinary) events, but I worry that the details are not sufficient to alert the consumer when he or she is sitting down with a broker who has parked his license at various firms or a brokerage firm that hires people with sketchy regulatory histories.  Couldn’t we provide more detail in this section, at the risk of (horrors!) moving some relationship summaries from four to five or even six pages?

I also like the fact that brokerage firms would no longer use the term “advisor” in their marketing materials.  But I worry that they’ll just switch to terms like “financial planner” or “wealth manager,” and it’s uncertain from the Proposal whether it would be, or not be, legal for, say, Merrill Lynch to switch from “talk to one of our financial advisors,” to “ask your Merrill Lynch financial planner for the best advice on growing your financial assets…”

No doubt you’re keeping score in your mind.  Is this relationship summary a win or a lose proposition for fiduciary advisors?  I think net-net it’s going to be roughly neutral, which I believe was the SEC’s intent; don’t rock the boat but seem to be tough about addressing concerns that have bubbled up from Dodd-Frank, from the DOL Rule and from consumers who are concerned about the misleading advertisements and promotions from the brokerage community. 

Meanwhile, it represents yet another (albeit minor) paperwork hassle for everybody on all sides of the fiduciary divide.

Bottom line: the SEC could have done a lot more to address consumer confusion.  Maybe it will after the 90-day comment period.

Which reminds me: You can submit comments to or an email to  You should include File Number S7-08-18 in the subject line.