you managing many billions of dollars of assets. Yet, you exist in a legal limbo. Your professional duties can subject you to lawsuits in one state but not in another. Statutes and organizations vary widely in the way they do or do not distinguish among financial planners, financial advisers, and investment advisers. You can tell clients you are an insurance agent and yet, in some states, legally be held responsible as a financial planner. The first step, then, in protecting your practice is to determine what exactly you do and what you are legally entitled or required to call yourself.
CHAPTER 1
THE FINANCIAL PLANNER
FINANCIAL PLANNERS and advisers find themselves on their own, trying to figure out how to describe their services accurately and how to play fair. Many follow the lead of their professional organizations in simply describing a financial planner as a person whose business is personal financial planning. While federal and state regulations are often excruciatingly more specific, they may not agree.
Not only is it hard to define who is a financial planner, it is difficult to determine what laws and rules apply to the profession.
Unfortunately, there is no significant body of law to use as guidelines regarding standards for financial planners and advisers. Because the financial planning profession and the statutes regarding the profession are so new, few cases have been tried under these laws; fewer still have been appealed and therefore reported as authority.
To protect your practice, you need to be aware of the nuances various legal entities and professional organizations incorporate in their definitions of what constitutes financial planning activities and who qualifies as a financial planner. In general, the various definitions are anchored in one of two basic precepts: “holding out” (i.e., title used) or “in the business” (i.e., services provided). As explained below, the federal government, the various state governments, and your own professional organizations are not consistent in which approach they use.
AT THE FEDERAL LEVEL, the SEC uses the services provided approach to define financial planning in these terms:
Financial planning typically involves providing a variety of services, principally advisory in nature.. regarding the management of.. financial resources based upon an analysis of individual client needs. Generally, financial planning services involve preparing a financial program for a client based on the client’s financial circumstances and objectives. This information normally would cover present and anticipated assets and liabilities, including insurance, savings, investments, and anticipated retirement or other employee benefits. The program developed for the client usually includes general recommendations for a course of activity, or specific actions, to be taken by the client. For example, recommendations may be made that the client obtain insurance or revise existing coverage, establish an individual retirement account, increase or decrease funds held in savings accounts, or invest funds in securities. A financial planner may develop tax or estate plans for clients or refer clients to an accountant or attorney for these services.
“The provider of such financial planning services in most cases assists the client in implementing the recommended program by, among other things, making specific recommendations to carry out the general recommendations of the program, or by selling the client insurance products, securities, or other investments. The financial planner may also review the client’s program periodically and recommend revisions.8
To summarize, the SEC defines a financial planner as a person who does business in the following manner:
• Provides advisory services regarding the management of financial resources
• Provides analysis of individual client needs • Prepares a financial program based on the client’s financial circumstances and objectives, including:
– present and anticipated assets and liabilities
– insurance
– savings
– investments
– retirement and employee benefits.
The SEC staff believes most financial planners also:
• Provide special recommendations for client action
• Assist the client in implementing the recommendations
• Periodically review the program and recommend revisions.
STATE DEFINITIONS OF financial planners vary considerably and utilize either or both of the two basic precepts: holding out and in the business.
Maine seems to use both the holding out and the in the business concept by defining a financial planner as “a person who provides a variety of services, principally advisory in nature, to consumers with respect to management of financial resources based upon an analysis of individual consumer needs.” 9 Under this definition, “financial planner” includes, but is not limited to, persons “who designate themselves financial analysts, advisers, consultants or planners, financial management advisers, securities or investment analysts, estate planners or other such terms.”
Maryland, on the other hand, uses only the holding out definition. It requires all who hold themselves out, among other things, as “financial planners” to register as investment advisers.10
Minnesota also uses a holding out approach, and its regulations and statutes incorporate a very broad definition. In this state, a financial planner is any person who indicates he or she is a “financial planner, financial counselor, financial adviser, investment counselor, investment adviser, financial consultant, estate planner, or any other similar designation.”11 Thus, financial planners are all who hold themselves out using one of these magic words on their business cards, letterheads, signage, or yellow page advertisements.
Some years ago, a large brokerage firm in Minnesota took the position that its registered representatives were stockbrokers and did not provide financial planning services. As a result, the firm did not consider them financial planners. This analysis may have been correct under SEC regulations or the IAFP’s definition discussed below. However, those definitions did not apply to the state’s law. Because the brokerage firm was calling its registered representatives financial consultants, the Minnesota Department of Commerce found those representatives were indeed financial planners, whether or not they actually did financial planning. Not only were these brokers miraculously transformed into financial planners, suddenly they also had a statutory duty to act as fiduciaries rather than just sales representatives. The firm also received a $30,000 fine for failing to provide certain paperwork to its clients, another state requirement of financial planners.12
The vast majority of insurance agents in Minnesota believe they are plain-vanilla life insurance agents. However, almost all of them provide estate planning services. After all, the two purposes of insurance are to build an estate and to preserve an estate. It would make sense that anyone selling this kind of insurance would be an estate planner. However, “estate planner” is a magic phrase under the Minnesota definition of financial planners. Most life insurance agents are surprised to find they are considered to be financial planners because they do estate planning.
Although Minnesota life insurance agents often find themselves classified as financial planners under their state’s specific law on that subject, those living elsewhere should be aware that their state’s insurance laws may also
Investment Advisers Act Release No. IA-1092 (October 8, 1987).
32 M.R.S. § 9752 (1995).
MD. Corps. & Ass’ns. Code Ann. § 11-101 (f) (1) (ii) (3).
Minn. Stat. § 45.026 and Minn. Rule 2875.105.
News Release from Minnesota Commerce Department, May 22, 1990.
