Shouldn't There be a "Financial Planner License?"

Oct. 22, 2018

When speaking with a group of financial planners recently, I was somewhat surprised to learn that some believe that financial planners should be subject to additional regulation in Minnesota.  They were concerned (and rightfully so) that anyone could hang a shingle and call themselves a financial planner without first obtaining a financial planner license, or navigating some other barrier to entry to screen out those too inexperienced or too smarmy to be entrusted with providing this important service.

 

My surprise was not due to disagreement—I absolutely think financial planners should be regulated.  Rather, as a former securities regulator, I think of financial planners as already working within (or, certainly on the very edges of) a highly regulated financial services industry.  Although it may be easy for someone to hang a shingle and call themselves a financial planner, doing so without complying with existing securities and insurance regulations exposes that person to significant administrative and civil liability. 

 

Hoping to shed light on the existing regulatory framework applicable to financial planners, I offer here my perspective on how a state regulator might look at a financial planner in the context of an enforcement investigation.

 

Setting the Stage

 

Consider the following hypothetical:  

 

Jane, a Minnesota resident, walks into an office in Anywhere, Minnesota with a sign reading “Joe Schmoe Financial Planning” and engages Joe to provide financial planning services.  Joe drafts a financial plan for Jane, which includes broad advice regarding saving for retirement, saving for her kids’ education, and tax planning.  The financial plan also includes investment advice on types of securities and insurance products Jane should purchase or avoid.  Jane pays Joe a fixed fee for his services.  Joe also refers Jane to Dan, a registered insurance producer and broker-dealer agent, who sells Jane insurance and securities products based on Joe’s recommendations.  In exchange for this referral, Dan pays Joe a share of the commissions he earns on the products he sells to Jane. Though Joe suspects that Dan sells risky products to Jane in order to maximize his commissions, Joe does not inform Jane of this suspicion-- nor does he inform her of the commissions he receives from Dan.

 

Jane later learns that she lost a significant amount of money on one of the products she purchased from Dan.  She also learns that Joe earned a significant commission related to the sale of that product.  Jane is so angry that she decides to file a complaint with her state regulator, the Minnesota Department of Commerce (“Commerce”), claiming Joe breached the duties he owned to her as Jane’s financial planner. 

 

Assessing Jurisdiction

 

When a regulator first receives a consumer complaint, it will look to see if it has jurisdiction to investigate.  Commerce has broad jurisdiction over providers of financial services doing business in Minnesota, including broker dealers, broker dealer agents, investment advisers, investment adviser representatives, insurance agents, real estate professionals, certain banks and credit unions, notaries, and… you guessed it, financial planners.  Commerce will look at Jane’s complaint to assess whether the target of the complaint (Joe) fits within one or more of those regulated “buckets” falling within Commerce’s jurisdiction.

               
To determine whether Joe is a “financial planner,” an “investment adviser,” a “broker-dealer” an “insurance producer,” etc., a Commerce investigator will look to both law and fact.  Most of these terms are defined in Minnesota state statutes.  If Joes’ activities cause him to meet one or more definitions—and he may meet multiple definitions— Commerce has authority to investigate whether Joe violated state requirements applicable to those defined entities. 

 

What is Joe Schmoe ?




Regulated as Financial Planners

 

First, Commerce has jurisdiction over financial planners doing business in Minnesota.  Many financial services professionals may be unaware of certain Minnesota regulations that target financial planners specifically.  For example, Minnesota Statute § 45.026, explicitly states that “persons who represent that they are financial planners have a fiduciary duty to persons for whom services are performed for compensation.”  This statute also clarifies that financial planners are subject to Minnesota Statute § 45.027 Subd. 5, which authorizes Commerce to take certain actions to address or prevent a financial planner’s breach of his fiduciary duty to clients.

 

How this applies to Joe Schmoe: Because Joe represented to Jane that he is a financial planner (via, if nothing else, the sign on his door), and because Jane compensated Joe for his services, Commerce will likely take the position that Joe owed Jane a fiduciary duty.  Commerce may find that Joe breached his fiduciary duty to Jane by failing to put Jane’s best interests ahead of his own (i.e., Joe did not disclose to Jane that he received commissions from Dan, and ignored his suspicions about the products Dan sold to Jane).  Commerce could sue Joe or refer an investigation to the Attorney General’s office in order to enjoin Joe from continuing to act as a financial planner.  Jane could also sue Joe in civil court in an attempt to recover damages related to Joe’s breach of his fiduciary duty.

 

Regulated as Investment Advisers

 

Second, Commerce has jurisdiction over investment advisers doing business in Minnesota—this is true whether someone is registered as an investment adviser or should be so registered.   Technically, Commerce has primary jurisdiction over investment advisers doing business in Minnesota with assets under management (AUM) of under $100 million, while the federal Securities and Exchange Commission (“SEC”) has primary jurisdiction over investment advisers with AUM above that threshold.  However, Commerce can investigate any investment adviser doing business in Minnesota that may have engaged in fraudulent activity or other conduct prohibited by the Minnesota Securities Act.  Included in Minnesota's definition of "investment adviser" (see Min. Stat. 80A.41)  is "a financial planner or other person that, as an integral component of other financially related services, provides investment advice to others for compensation as part of a business or that holds itself out as providing investment advice to others for compensation." 

How this applies to Joe Schmoe: Because Joe’s financial plan, which Jane paid for, includes investment advice, Joe meets Minnesota’s definition of investment adviser.  As such, Joe is subject to a myriad of compliance requirements under the Minnesota Securities Act and its implementing regulations, including the prohibitions included in Minn. Rule 2876.5023.  Like financial planners, investment advisers owe a fiduciary duty to clients.  Using its enforcement authority under the Minnesota Securities Act, Commerce could issue an order against Joe enjoining him from acting as an unregistered investment adviser and fining him up to $10,000 per violation of the Minnesota Securities Act. 

 

Regulated as Broker-Dealers

 

Third, Commerce regulates broker-dealers and their agents doing business in Minnesota.  Again, this is true whether someone is registered as a broker or agent or should be so registered.  Both “broker-dealer” and “agent” are defined in Min. Stat. 80A.41.  Generally speaking, a person meets one of these definitions if he effects or attempts to effect purchase or sales of securities in another’s account for compensation. Broker-Dealers and their agents are also subject to FINRA rules and federal regulations enforced by FINRA and the SEC.

 

How this applies to Joe Schmoe:  Because Joe is not directly trading in securities accounts on behalf of Jane, he is unlikely to meet the definition of broker-dealer.  However, if Dan is a registered agent of a broker-dealer and pays Joe for client referrals, an argument could be made that Joe should also be registered as an agent of Dan’s broker-dealer.  Using its enforcement authority under the Minnesota Securities Act, Commerce has jurisdiction to investigate this issuer further.  Depending on the outcome of that investigation, Commerce may enjoin Joe from acting as an unregistered agent and fine him up to $10,000 per violation of the Minnesota Securities Act.  Commerce could also take action against Dan and Dan’s broker-dealer for associating with an unregistered agent, selling unsuitable products to Jane, and other potential violations.  Both Joe and Dan could also be subject to enforcement actions brought by FINRA or the SEC.

 

Regulated as Insurance Producers

 

Fourth, Commerce regulates insurance producers doing business in Minnesota.  Yet again, this is true whether someone is registered as an insurance producer or should be so registered.  “Insurance producer” is defined in Min. Stat. 60K.31 Subd. 6.   Generally speaking, a person meets this definition (and must obtain an insurance producer license) if he sells, solicits, or negotiates insurance in Minnesota.

 

How this applies to Joe Schmoe:  Because Joe is not directly selling insurance products to Jane, he may assume he is not subject to insurance license requirements.  However, again, Joe’s association with Dan could cause Joe to be indirectly subject to Minnesota’s insurance regulations.  Commerce has jurisdiction to investigate this issuer further and, depending on the outcome of that investigation, could take action against Joe for violations of Minnesota’s insurance regulations.

 

Who Regulates Who?

 

Commerce

SEC

FINRA

Financial Planner

x

 

 

Broker Dealer/Agent

x

x

x

Investment Adviser/Representative

x

x

 

Insurance producer

x

 

 

 

 

Assessing Joe’s Possible Defenses


I didn’t do anything wrong, so I don’t need to answer you.


If Joe finds himself on the wrong end a regulatory inquiry, it is generally not a good idea to for him to thumb his nose at the regulatory agency and refuse to respond to questions.  Though there is a time and place for challenging a regulator’s jurisdiction, being difficult or non-responsive is likely to invite more scrutiny before it leads to less.  Also, in an administrative action or civil lawsuit, a defiant Joe may find that the burden is on him to prove he is not subject to Commerce’s jurisdiction, not the other way around.  (See, e.g., Minnesota Statute § 80A.70.)


I didn’t know I was subject to a fiduciary duty and therefor shouldn’t be held to that standard.

 

Minnesota Statute § 45.026 makes it crystal clear that, because Joe held himself out as a financial planner and received compensation for financial planning services, he owes a fiduciary duty to Jane.  As discussed above, Joe's practices also cause him to fall within Minnesota's definition of "investment adviser" in Minnesota Statute 80A.41.   Even if Joe was honestly unaware of either statute, Joe is not going to get very far with regulators or a judge arguing he did not owe a fiduciary duty to Jane.  As they say, ignorance of the law is no excuse.


I am “only” a financial planner, I am not an investment adviser, broker or insurance producer.


Just because Joe does not hold an active license/registration administered by Commerce does not mean Commerce lacks jurisdiction over him.  Commerce has authority to investigate those who are or should be licensed/registered to do what they are doing.  Failure to become licensed/registered when acting in a capacity that requires a license or registration is, itself, a violation for which Joe may be penalized.  It is theoretically possible for someone to engage in financial planning services without triggering the definitions of “investment adviser” “investment adviser representative” “broker-dealer” “agent” or “insurance producer”, but threading that needle would, in my view, be quite difficult, and leave a financial planner with a very limited scope of services.  Even then, someone who is “only” a financial planner owes a fiduciary duty to clients and must act accordingly.


Just because my client lost money doesn’t mean it’s my fault—if anything, its Dan’s fault.

 

It is true that financial planners, brokers, and investment advisers are not strictly liable every time a client loses money.  (Who would dare go into financial services if that were the case?)   It is also arguably true that Dan is more at fault than Joe in the above hypothetical.  However, for the reasons described above, Joe owes a fiduciary duty to Jane and, therefore, must put her best interests before his own.  By referring work to Dan knowing Dan may be selling unsuitable products to Jane, and by not disclosing Joe’s conflict of interest to Jane (the fact that Joe receives a commission from Dan), Joe has breached his fiduciary duty to Jane.  Simply blaming Dan for Jane’s harm is unlikely to get Joe off the hook in this scenario.

 

Conclusion

Many financial planners wear multiple hats that already expose them to significant regulatory oversight and compliance requirements.  Those considering going into the financial planning field should think twice before assuming they are entirely unregulated.   

Written By:
Brian Edstrom

Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen seven years of experience working for federal and state regulators.

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