Does A Series 7 Make You A Registered Representative
Executive Summary
With the flurry of activity and attention surrounding the Department of Labor'southward fiduciary rule and whether it will exist delayed or not, there has been a dramatic increase in media coverage around what information technology means to be a fiduciary, and a button for consumers to seek out RIAs over those who work at banker-dealers. Despite the fact that most advisors, at both RIAs andbroker-dealers, are trying to do the right affair for their clients.
In this week'south #OfficeHours with @MichaelKitces, my Tuesday 1PM EST circulate via Periscope, we discuss why being a fiduciary matters, and why Serial 7 licensees technically Tin'T be total fiduciaries to their clients without the DoL fiduciary rule.
The fundamental outcome is that the Serial 7 examination is technically the "Full general Securities Representative Test". This name is important, because it indicates that ultimately, the licensee is acting as a representative of the broker-dealer. In other words, a Serial 7 license allows an private to stand for the banker-dealer in the sale of securities products to clients. This is why Series 7 licensees are referred to as "Registered Representatives" of a particular broker-dealer.
And as a representative of the broker-dealer, the banker technically has an obligation to serve the banker-dealer,not the client. This is why a banker-dealer tin terminate a broker for outside business activity, or for soliciting a client to move with them to a new banker-dealer. In fact, technically the client isn't even a client of the broker's; it'due south a client of the broker-dealer's, and the broker is but the sales representative. That'south why it's illegal for the banker to take whatever client information when irresolute banker-dealers!
Of course, in today's environment, the overwhelming majority of those working at a broker-dealer are dual-registered as a sales rep under the broker-dealer and working under a corporate RIA. Nonetheless, anytime the broker sells a product and earns a commission (i.e., using the Series 7 license), the broker is non a fiduciary, only a sales representative! Notably, these advisors are fiduciaries when they give under the RIA and are paid an advisory fee. But they are still effectively wearing ii hats, and cannot be full fiduciaries while the Series seven hat is on!
And the reason all this matters is because, if someonewantsto take coin from their clients past selling high-committee 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 behavior. That's why it matters - it'due south not most the already-good advisors who are doing the right thing, but about raising the bar to reduce the risk of bad brokers who try to exercise the worst they (legally) tin. Which is why the focus on fiduciaries vs not-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 (broker) is simply to recommend avoiding all of them.
The lesser line, though, is to recognize that Series 7 licensees are legally sales representatives. And if you 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, information technology may all presently exist a moot point - as everyone working with retirement investors will be field of study to the same fiduciary duty, regardless of their current business model! Ultimately, though, until brokers either voluntarily motility to a new concern model or are held to new DoL fiduciary standards, the reality volition remain that you can't be a full fiduciary with a Series 7 license!
(Michael'south Notation: The video beneath was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you become the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
With the flurry of activity surrounding Department of Labor'south fiduciary rule and whether it will be delayed or not, there'due south been a huge increase in media coverage effectually what it ways to be a fiduciary in the first identify and why it matters for consumers. And as a result, more and more than consumers seem to really be request questions well-nigh whether the person they work with is a fiduciary or non, which in today's market, favors the RIA channel, and puts growing force per unit area on those who work in insurance companies and broker-dealers.
In that context, I want to kick off this calendar week's "Office Hours" with a contempo question that came to me from an advisor friend who built his do nether...let'due south just say, a "well-known contained broker-dealer". We'll call him "Jim". So Jim sent me this message recently, and it said:
"Michael, I built my practice by doing the correct things for my client from solar day one, and I've e'er acted as a fiduciary to my clients. Information technology'south just proficient business. Why do nosotros have to make this about RIAs versus broker-dealers, instead of but talking almost who's doing the right thing for their clients?"
Amen, Jim. Great question. I'g seeing this give-and-take come up upwards more than and more lately, particularly from those who work nether a broker-dealer and really exercise try to give communication in the best interests of their clients, and maybe only use commission-based products when it's genuinely prudent to exercise so because it's actually what the client needs.
But here is the challenge and why information technology matters... because from the legal perspective, the nature of the relationship with a client really is unlike when you're under a broker-dealer versus an RIA. I know we similar to all call ourselves "advisors", regardless of which aqueduct we work in, just the reality is that, technically, you tin't actually exist a fiduciary to a client based on a Serial vii license.
Why A Series 7 Licensee Can't Exist A Fiduciary [Time - 1:46]
I realize that'southward a strong argument to brand – that you tin can't be a fiduciary to a client based on a Series 7 license – so let me explain further.
The Serial 7 test, which is what near everyone in today's world takes when they're going to work under a banker-dealer, is really just a shortened label. The full name for the Series 7 exam is the "General Securities Representative Test".
Now, the "general securities" office means the licensing exam pertains to any and all "general" types of investment securities. Past contrast, the Series vi examination is a "mutual funds and variable products securities representative". Only the Series 7 is a General Securities Representative exam. Thus, the Series 7 licenses yous to sell common funds and variable annuities, but also stocks and corporate bonds, annuities, direct participation programs, etc.
Just it'southward the second function of the Serial seven examination championship that matters hither. It's the General Securities Representative Exam. Representative of what? Representative of the broker-dealer. In other words, when you take the Series 7 test, quite literally, it's a license to allow yous to represent the broker-dealer in the auction of its products.
That'due south why you have to exist sponsored by a banker-dealer to accept the exam, because you lot can't, working straight as an contained advisor with a customer, sit for the Series seven exam. You're a representative of the broker-dealer. They have to sponsor yous to take the exam then you can become their rep!
Similarly, that's why you take to put on your business organization menu, the footnote of your website, and any slice of paper you lot ever hand to the client, that disclaimer: "Then-and-so is a registered representative of the Such-and-such broker-dealer". Considering legally, you're non there to give communication to the customer. In fact, information technology'south non fifty-fifty actually your client. It's the broker's dealer's client, and you are a sales representative of the broker-dealer.
Now, I know that sounds harsh for some of you that are working in a broker-dealer. Yous may even be aroused with me right now for calling yous a sales rep. But delight don't shoot the messenger. It'southward just the actual legal reality of how the laws are written.
In fact, the whole reason you're not subject to a fiduciary duty now as a Series seven rep under the Investment Adviser's Act of 1940 is that the Adviser's Act has an exclusion that says if you work for a broker-dealer and your advice is solely incidental to the sale of brokerage products, yous don't have to get an RIA.
So literally, the only way you avoid being an RIA nether current law is that yous have to non exist in the business organization of giving advice and primarily be in the business of selling the products of your broker-dealer!
Brokers Are Obligated To Their Broker-Dealer Over Their Clients [Time - iv:thirty]
Here'southward why that matters from the perspective of this question being a fiduciary to your client... because when it'due south non your client – it's the broker dealer's customer and you work as a sales rep for your broker dealer'southward products – legally, your duty is not to the client. Information technology actually can't be. Your duty is to the broker-dealer that you represent.
That's why when y'all leave a broker-dealer, yous can't take your customer data with you. You tin can't take your client files. You tin't take the financial plans. You can't fifty-fifty have a listing of their business relationship numbers. At best, the broker protocol only allows you to take basic names and contact information. And really, that's just because you lot tin can wait it upward online anyway at this point! It's barely private information!
Similarly, that'southward why even if you mention to your clients that you're planning to alter broker-dealers, your broker-dealer can end yous immediately with a U-5. It'southward not just considering they're agape you're going to leave and want to preemptively fire you. Information technology's because soliciting clients for your new business organization while you're withal a representative of their business is a breach of your employment contract with your broker-dealer. Considering information technology's the broker dealer's client, and legally, yous are a sales rep of the banker-dealer.
And that'southward why fifty-fifty under the Department of Labor'southward fiduciary proposal, as the broker, yous would not actually be signing the All-time Interest Contract with your client. The contract gets signed with the broker-dealer. Considering, technically, the broker-dealer is the ane with the client relationship, and the broker-dealer is the 1 that is going to exist held to a fiduciary duty. At present, apparently if you work nether a broker-dealer every bit their rep, if the BD has a fiduciary obligation, they will impose that expectation on you lot to also act every bit a fiduciary. Merely it's all the same subject to their oversight, because technically, yous're still not the fiduciary. The banker-dealer is the fiduciary. Yous're the fiduciary's fiduciary rep!
Dual-Registered And Hybrid RIA Fiduciaries [Fourth dimension - 6:15]
It's worth naught that in today'south environment, the overwhelming majority of those who work in a banker-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 case, you're effectively wearing ii hats. One truly is a fiduciary nether the RIA, and the other is as a sales rep for the banker-dealer. When you sell a product and generate an order commission, you're not an advisor or a fiduciary, you're a sales representative. When yous separately requite actual advice under the RIA and get paid an advisory fee, and so you're really operating as a fiduciary.
Although notably, even in the latter scenario, you're actually technically still a rep. You're an investment advisor representative, or IAR, of the corporate RIA, simply that actually still means it's not your client. You must laurels your employment contract with your RIA, first and foremost. But since the RIA is held to a fiduciary duty and they want yous as their rep to honor that, they'll be held answerable, so yous're held accountable as a fiduciary under their supervision.
Why Being A Fiduciary Is Different Than But Interim Like One [Time - 7:11]
Only here is the key bespeak, in the context of the earlier conversation about why trying to practice the right thing for your client and acting as a fiduciary is unlike than whether you lot legally are ane...
Information technology'southward pretty universal that trying to exercise the right thing for your client is practiced for business in the long run. And I know about advisors do this. I see thousands of advisors at broker-dealers when I speak at their national conferences, and I know that most of us in the industry - regardless of RIA or broker-dealer channel - are really trying to exercise the right thing for our clients. And not because we're legally obligated to, merely simply because we took this chore to help people, and it's skillful for business to truly try to help them and serve their interests.
But the legal reality is notwithstanding that you're not a fiduciary, and you tin can't be a fiduciary that puts your clients' interests first in all situations, because you still have a primary legal obligation to stand for your banker-dealer and their interests instead. And the very fact that you're operating under a Serial 6 or Series vii license, which again, literally are sales representative examinations - it has "rep" in the title - precludes your power to fully deed as a fiduciary for clients.
You lot may nonetheless exist doing the right matter for your clients, regardless of all of this legal stuff, and say information technology's a moot betoken. But the problem is still that you're not obligated to, or maybe it's more than accurate to say, "The other brokers in your firm are not obligated to," and this is why the media picks on it. Considering the simply thing the other reps in your firm are obligated to do is provide their disclosure information to every client, and affirm basic suitability before they sell the highest-committee product they perchance can. And it'due south legal because it was a production sale, not advice, then it's caveat emptor and not subject to the fiduciary duty.
Think of it from the other perspective. Imagine you're a bad counselor...or y'all're not even an advisor. Yous're an evil sales dude whose goal is to become as many clients as possible to role with as much of their coin as yous can.
Basically, you have three choices: number one, steal their money; number ii, sell products that pay giant commissions; number three, become paid a 1% informational fee. Now, number i, stealing, information technology is outright illegal in any world, so not a very appealing option to adventure jail fourth dimension. Number three, getting paid a 1% advisory fee, is a really ho-hum way to have your client's money, and not really helpful if you're trying to do bad things. Merely number ii... overwhelm people with disclosures, make your circuitous sales pitch, get them to say yes once in a moment of weakness and and then they can't take information technology dorsum because at that place are surrender charges, and you can accept 10% of the internet worth of everyone you meet! That'south a pretty sweet opportunity.
And that's why the fiduciary duty matters. Information technology'southward non almost trying to force you, the broker who is already trying to practise the right thing, to do the right thing. It's to screen out the people who might be posing as advisors but trulyarejust trying to sell the crappiest high-commission production they legally can.
In other words, fiduciary is most raising the minimum bar on what the worst person in your arrangement might do if they wanted to be nefarious. Because once again, as a Serial 7 rep, you take no obligation to be a fiduciary. Information technology might be expert long-term business concern to exercise the right thing. But unfortunately, it's too a pretty good short-term business organization to sell the crap out of the highest-commission product you can find, and cash out, and move on later to some other business if you have to.
So every bit long as that tension exists - every bit long as there are sales reps at banker-dealers who are only required to fulfill their minimal obligations to their broker-dealer as a sale rep and have no obligations to the client and are subject to lower standards - the fiduciary standard will continue to be an upshot. And especially as long every bit sales reps continue to concur out to the public equally advisors, considering now the public tin't actually tell who's a sales rep and who's a fiduciary.
Except, the public really canplace the difference between a sale rep and a fiduciary, which the media now has picked upwards on... because sales reps, past definition, work at broker-dealers, and fiduciaries piece of work under an RIA. That's why you're seeing this dynamic emerge where what started out as fiduciary versus suitability is now morphing into advisors versus sales people and RIAs versus banker-dealers.
How DoL Fiduciary Equalizes Broker-Dealers And RIAs [Time - seven:xi]
But the bottom line, getting dorsum to Jim's question, is that if y'all don't like this surround and being called a sales person and dealing with the scrutiny on you lot, frankly, I'd ask yous to consider how you lot're structured and whether you lot want to modify information technology. Because as long as you choose to operate under a Series 7 license every bit a sales rep of a banker-dealer, you are legally a sales rep. That's the job and its legal status. That's why you have a duty to your broker-dealer. That's why they tin can fire you for breaching information technology. That's why you tin can't take your clients when you get out. That'due south certainly why you can't sell the business and the clients in it the way that you tin with an RIA.
Which ways if you really want to operate every bit an advisor and hold out that way and not exist a sales rep, you need to be affiliated with an RIA. That's only the legal reality of how the rules are structured.
Now, ironically, if the fiduciary rule does not get delayed and actually goes through, then 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 then this whole fiduciary give-and-take, and even much of the give-and-take about RIAs versus broker-dealers volition become a moot point.
And so if you're frustrated with the current fiduciary discussion, and you're in a broker-dealer environment, y'all should actually exist 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 business organisation, considering now banker-dealers can be held to a similar fiduciary duty as the RIA, and so fiduciary would no longer be a differentiating discussion. At least pertaining to retirement investors, as that'south the limited scope of the DOL's rule.
In the meantime, I hope that provides some food for thought around fiduciary versus suitability, and why we're seeing this morph into an RIA versus banker-dealer word. This is "Function Hours" with Michael Kitces, one p.m. E Coast time on Tuesdays. Thanks for joining us and take a great day anybody!
And then what do you lot retrieve? Can someone with a Series 7 exist a fiduciary? Have you noticed the dialogue effectually fiduciary versus suitability shifting? Does actually being a fiduciary affair more than simply acting like one? Please share your thoughts in the comments beneath!
Does A Series 7 Make You A Registered Representative,
Source: https://www.kitces.com/blog/fiduciary-duty-broker-dealer-series-7-license-general-securities-representative-exam/
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