FINRA’s Perversion of the Word “Advisor”

FINRA interprets “financial advisor” as being usable (on business cards and elsewhere) by any financial professional who holds an RIA affiliation, whether or not the relationship with the client is in fact an advisory one.

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This is illogical for the reasons that follow.

In mathematical logic, the Law of Syllogism says that if the following two statements are true:

1. If pp, then qq.
2. If qq, then rr.

We can derive a third true statement:

3. If pp, then rr .

Example:

If the following statements are true, use the Law of Syllogism to derive a new true statement.

1. If it snows today, then I will wear my gloves.
2. If I wear my gloves, my fingers will get itchy.

Let pp be the statement “it snows today”; let qq be the statement “I wear my gloves”; and let rr be the statement “my fingers get itchy.”

Then (1) and (2) can be written

1. If pp, then qq .
2. If qq, then rr .

By the Law of Syllogism, we can deduce;

3. If pp, then rr

or

If it snows today, my fingers will get itchy.

We can use this logical principle to understand that FINRA’s interpretation of the meaning of the word advise(o)r post-Reg BI does not withstand logical scrutiny, using the following simple proof:

P: If an associated person of a Broker Dealer can be called an “adviser”, then they must also be an IAR of an RIA.

The veracity of statement P is supported by FINRA’s issuance of answers to FAQs on Reg BI, available here.

Q: If a financial professional operates as an IAR of an RIA, then under this authority, the individual can receive compensation in exchange for verb, NOT NOUN, delivery.

The veracity of statement Q is supported by Section 202(a)(11) of the Advisers Act, which generally defines an “investment adviser” as any person or firm that: (1) for compensation; (2) is engaged in the business of; (3) providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications. A person or firm must satisfy all three elements to be regulated under the Advisers Act.¹

Said differently, when we add an “r” to the end of a verb to describe a person, we are describing the identity of the person who routinely performs an action. We wouldn’t call a person who once ran across the street a “runner.” We call a person a runner when they routinely run, such that part of their identity can be described by adding an r to the end of the verb they routinely perform. This means that an adviser is a person who routinely advises. Professional advising means to give advice in exchange for compensation.

Read the full article here by Michelle Richter, Advisor Perspectives.