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The vast majority of the more than five million men and women who serve as trustees of personal trusts and members of investment committees rely on investment consultants for guidance in managing their investment fiduciary responsibilities. As critical as the investment consultant’s role is to the fiscal health of this nation, essentially it is still a poorly regulated, undefined profession.

Within the regulatory environment, the term “investment consultant” is not clearly defined—“investment adviser” is defined, but not investment consultant.[1] When we examine the SEC’s Division of Investment Management, we see a regulatory framework defined by the Investment Advisers Act of 1940, which was designed for the oversight of investment advisers, or money managers.

But investment consultants are not money managers—they’re something else—and it’s in the public’s best interests that this something else be properly regulated. For the purposes of this article, the term “investment consultant” includes broker consultants, wealth managers, financial advisors, private bankers, estate planners, financial consultants, and investment advisors (note “or” version as opposed to adviser) —all terms that, like investment consultant, lack specific regulatory definition. It’s a rather extensive list. Why do we seem to mask investment consulting services with so many different titles?

At last count, there are at least five different ways an investment consultant can be regulated:

1. By the SEC at the federal level if the investment consultant has more that $25 million under management or is providing consulting services to pension plans with assets of more than $50 million.
2. By the states (except Wyoming) if the investment consultant does not meet the requirements to register at the federal level.
3. By the NASD or the NYSE and the SEC if the investment consultant is a broker-consultant.
4. By the OCC if the investment consultant is part of a national banking institution.
5. By state Insurance Commissioners if the investment consultant is representing the services of an insurance company.

Name one other profession that has as many regulatory alternatives. I can’t think of any.

If one regulator is to be chosen, who should it be?

The logical candidate is the SEC, but only if a separate new division is created or a separate office or branch within the Division of Investment Management. The SEC is attempting to regulate money managers and certain investment consultants with the same policies and procedures, and the results are less than satisfactory. One need only read the SEC’s disclosure form for investment advisers (ADV Parts I and II, or the information about a firm on the Web IARD) to see that the available information does not provide adequate disclosure for the activities of an investment consultant.[2]
 

 

Related to this issue is the ongoing debate over the SEC’s broker-dealer exemption.[3] The brokerage industry has undergone a fundamental change in the past twenty-plus years. Today, many brokers are providing comprehensive and continuous investment advice, as opposed to “incidental advice,” which is the basis for the broker-dealer exemption. The broker-consultant doesn’t look like a money manager, but neither does the broker-consultant look like a broker—the broker looks like something else, like an investment consultant!

Further evidence of the SEC’s struggle in understanding the role of the investment consultant is its apparent inability to bring closure to its ongoing fifteen-month sweep investigation into the investment consulting firms involved in “pay-to-play” schemes. The SEC didn’t have any difficulty tagging brokerage firms with the inadequate disclosure of payments money managers (mutual fund families) were making for preferential treatment by brokers. But when the exact same activity involves money managers and investment consultants, the SEC appears to be stymied.

The SEC is the logical home for investment consultants because of its long recognition of the fiduciary standard of care that is owed to the public by its regulated entities. The term “investment consultant” explicitly implies independent, third-party objectivity—“trust me.” And when the public extends that trust to an investment consultant, the consultant becomes a fiduciary.

Unfortunately, few investment consultants have acknowledged their fiduciary status, let alone understand the practices associated with such status. Why should they? With such limited regulatory oversight, they’re able to charge professional fees without conforming to professional, fiduciary standards of care.

Special thanks to Jane Katz Crist, Esq. for her assistance and inputs to this article.