Charles Schwab in Praise of Fiduciary Independent Advisers

Posted in: Business Law

Brokers have been fighting against bearing fiduciary duties. They fought in the courts, the legislatures, the federal regulators, and the federal government. Yet one aspect of their war seems to be creeping slowly from the darkness to reach the light and offer a peek to touch the public. While the brokers’ organizations continue to engage in this fight, one of the largest advisorybrokerage firms, the Charles Schwab firm, has recently publicly adopted and highlighted not only its advisory position, but also its fiduciary duties when acting as advisers. This firm seems to see the light and is moving toward it.

On November 6, 2019, the Wall Street Journal published an advertisement worth noting. Almost the entire page of the advertisement is occupied by a picture of a beautiful young woman. At the bottom of the picture are the words: “Rachel R. Independent financial advisor since 2004.” On the left side of the picture are the following words in large letters: “Independent advisors are accountable.” Then in smaller letters are the words: “How do you measure accountability? Investors trust independent advisors with $5 trillion of their money. The reason is simple: Independent Registered Investment Advisors are professionals held to a fiduciary standard. They exist to serve, not sell. That’s why we support independent advisors. And why we think it’s worth your time to learn more.”

Underlying the picture in fairly small letters is the following: “Charles Schwab is proud to be the largest supporter of one of the fastest-growing segments in financial services – independent financial advisors who are entrusted with $5 trillion of their clients’ wealth.”

This praise is (carefully) written: Charles Schwab makes a clear statement regarding independent investment advisers, who are fiduciaries. However, it does not seem to include brokers among these advisers. If sales talk is not advice, the public needs clarification. Yet, the Schwab statement seems to invite true fiduciary advisers to execute their orders at Schwab, as well as to concede that its advisers are subject to these duties. Advisers and brokers may be under the same roof but still be regulated differently. What Charles Schwab seems to say is: “Our brokers execute our independent advisers’ orders. We do not give advice. That is the domain of the independent advisers.”

On November 23, 2019, the Economist published a Charles Schwab advertisement featuring the face of a man and adding the words: “Investors trust independent advisors with $5 trillion. That’s some serious trust.” Under the picture in smaller letters are the words: “Charles Schwab is proud to be the largest supporter of one of the fastest-growing segments in financial services – independent financial advisors who are entrusted with $5 trillion of their clients’ wealth.”

Charles Schwab supports independent advisers and does not purport to be one of them. It is a broker, whose salespersons’ advice is sales talk. It is proud to support the independent trusted advisers, and for that it should be praised. But it does not and should not extend its pride to its own salespersons, unless it obligates itself and its sales people to give advice not as sales talk but as advice. Its pride and admiration must clearly extend to itself and its employees and people with whom it is related.

To be more fully informed: The Charles Schwab Corporation (“CSC”) is organized as a savings and loan holding company that engages in a number of financial activities through subsidiaries. CSC’s broker-dealer subsidiary is Charles Schwab & Co., Inc. (“CS&Co”). It is “Schwab’s principal broker-dealer” and is registered as both a broker-dealer and an investment adviser. Another subsidiary, Charles Schwab Investment Management, Inc. (“CSIM”), is the investment adviser for Schwab’s proprietary mutual funds and its ETFs. It is registered as an investment adviser.

Nonetheless, what is very important is that this large reputable organization, which serves both as an independent adviser, and as broker-dealer, found it desirable (and probably profitable) to highlight its trusted behavior and used the words fiduciary, which is the legal description not only of trusted persons but also of their legal obligations.

These advertisements suggest that the investors are beginning to learn the difference between brokers’ advice (sales talk) and advisers’ advice, which must fully identify with the clients’ interests, and may not be marred by conflicting interest (without the clients’ consent). Perhaps the publicity of the brokers’ fight in courts and the battles with the rule-makers did not pass by investors unnoticed. It took time to realize the meaning and importance of this issue, but the time seems close: Those who offer financial services purport to be experts to many investors and therefore have duties regardless of trusted persons, whether they advise about financial matters, or hold clients’ money, or trade on clients’ behalf.

What is also worth noting is that investors may have learned, either on their own, or through others, or in any other way. They do not learn the expertise to become experts. They learn to identify whom they can trust. This may take time, but learn they will! And the actors and servicers in the financial system, who follow and are more sensitive of this learning process and time frame, will survive, while others might not.

However, (i) if true advisers resort to Charles Schwab to execute the advisers’ orders for their clients, and (ii) if Charles Schwab’s brokers do not give their clients investment advice, but execute the orders, then perhaps its statement will clear the way to a better and more protective system than the current one, in which brokers give direct advice to investors, many of whom are unable to determine the right investment for themselves. This declaration of Charles Schwab may lead to a separation of advice from execution of trade in a more protective way than the current one, and this would be good news indeed.

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