Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws

There is no specific, direct regulation of “financial planners” per se at the  federal or state level. When acting as insurance agents, financial planners are  subject to state standard of care requirements, which can vary by product  and by state. Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations

At the federal level, SEC and FINRA have regulations on advertising and  standards of communication that apply to the strategies investment  adviser firms and broker-dealers use to market their financial planning  services. In addition, although the regulatory structure itself for financial planners  may generally be comprehensive, attention paid to enforcing existing  statute and regulation has varied. SEC staff told us that they did not have comprehensive data on the extent  of enforcement activities related to financial planners per se. Some Changes in the Oversight of Financial Planners Could Be Beneficial, but Most Stakeholders Believe Substantial Overhaul Is Not Needed

		Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners

Over the past few years, a number of stakeholders—including consumer  groups, FINRA, and trade associations representing financial planners,  securities firms, and insurance firms—have proposed different approaches  to the regulation of financial planners. While no single law governs the broad array of activities in which financial  planners may engage, given available information, it does not appear that an  additional layer of regulation specific to financial planners is warranted at  this time. Yet consumers may be unclear about  standards of care that apply to financial professionals, particularly when  the same individual or firm offers multiple services that have differing  standards of care. As such, consumers may not always know whether and  when a financial planner is required to serve their best interest. Second, we have seen that financial planners can adopt a variety of titles  and designations. Finally, SEC has limited information about the nature and extent of  problems specifically related to financial planners because it does not track  complaints, examination results, and enforcement activities associated with  financial planners specifically, and distinct from investment advisers as a  whole. However, a regulatory system should have data sufficient to identify  risks and problem areas and support decisionmaking. Because financial planning is a growing industry and has raised  certain consumer protection issues, regulators could potentially benefit  from better information on the extent of problems specifically involving  financial planners and financial planning services. We also recommend that the Chairman of the Securities and Exchange  Commission direct the Office of Investor Education and Advocacy, Office  of Compliance Inspections and Examinations, Division of Enforcement,  and other offices, as appropriate, to:  Incorporate into SEC’s ongoing review of financial literacy among  investors an assessment of the extent to which investors understand the  titles and designations used by financial planners and any implications a  lack of understanding may have for consumers’ investment decisions; and    Collaborate with state securities regulators in identifying methods to  better understand the extent of problems specifically involving financial  planners and financial planning services, and take actions to address any  problems that are identified. NAIC said  it generally agreed with the contents of the draft report and would give  consideration to our recommendation regarding consumers’  understanding of the standards of care with regard to the sale of insurance  products. Appendix I: Scope and Methodology

Our reporting objectives were to address (1) how financial planners are  regulated and overseen at the federal and state levels, (2) what is known  about the effectiveness of regulation of financial planners and what  regulatory gaps or overlap may exist, and (3) alternative approaches for  the regulation of financial planners and the advantages and disadvantages  of these approaches. In  addition, we spoke with representatives of the federal and state agencies  cited above, as well as FINRA and organizations that represent or train  financial planners, including the Financial Planning Coalition, The  American College, and the CFA Institute; organizations that represent the  financial services industry, including the Financial Services Institute,  Financial Services Roundtable, Securities Industry and Financial Markets  Association, Investment Advisers Association, American Society of  Pension & Professional Actuaries, National Association of Insurance and  Financial Advisors, American Council of Life Insurers, Association for  Advanced Life Underwriting, American Institute of Certified Public  Accountants, American Bankers Association; and organizations  representing consumer interests, including the Consumer Federation of  America and AARP.
Why GAO Did This Study

Consumers are increasingly turning for help to financial planners-- individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products, and managing tax and estate planning. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners. This report examines (1) how financial planners are regulated and overseen at the federal and state levels, (2) what is known about the effectiveness of this regulation, and (3) the advantages and disadvantages of alternative regulatory approaches. To address these objectives, GAO reviewed federal and state statutes and regulations, analyzed complaint and enforcement activity, and interviewed federal and state government entities and organizations representing financial planners, various other arms of the financial services industry, and consumers.

What GAO Found

There is no specific, direct regulation of "financial planners" per se at the federal or state level, but various laws and regulations apply to most of the services they provide. Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states, and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities. Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners. The regulatory structure applicable to financial planners covers the great majority of their services, but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain. First, consumers may be unclear about when a financial planner is required to serve the client's best interest, particularly when the same financial planner provides multiple services associated with different standards of care. SEC is studying these issues with regard to securities transactions, but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products. Second, financial planners can adopt numerous titles and designations, which vary greatly in the expertise or training that they signify, but consumers may not understand or be able to distinguish among them. SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed. Finally, the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints, examination results, and enforcement activities associated with financial planners specifically, and distinct from investment advisers as a whole. A regulatory system should have data to identify risks and problem areas, and given that financial planning is a growing industry that has raised certain consumer protection issues, regulators could benefit from better information on the extent of problems specifically involving financial planning services. A number of stakeholders have proposed different approaches to the regulation of financial planners, including (1) creation of a federally chartered board overseeing financial planners as a distinct profession; (2) augmenting oversight of investment advisers with a self-regulatory organization; (3) extending the fiduciary standard of care to more financial services professionals; and (4) specifying standards for financial planners and the designations that they use. While the views of stakeholder interests vary, a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities. Given available information, an additional layer of regulation specific to financial planners does not appear to be warranted at this time.

What GAO Recommends

GAO recommends that (1) NAIC assess consumers' understanding of the standards of care associated with the sale of insurance products, (2) SEC assess investors' understanding of financial planners' titles and designations, and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers. NAIC said it would consider GAO's recommendation and SEC provided no comments.