Broker/dealers who are not registered as investment advisors must now give brokerage customers a disclosure stating that their interests may not always be the same as their customers.

This follows on the heels of a compliance deadline for a rule that the Securities and Exchange Commission adopted in April exempting broker/dealers from registration as investment advisors when offering certain fee-based advisory programs to the public.

In order to reduce confusion in the public's eyes about the differences in regulatory standards for sales agents and financial advisors, the SEC in July then adopted a compliance deadline requiring registered representatives of a broker/dealer to provide customers with a prominent consumer warning statement that the account is a brokerage, and not an advisory, account. The statement also refers them to someone in the brokerage firm for additional questions.

The Financial Planning Association has now released a brochure to explain the difference between a brokerage account and an advisory account. Consumer Tips on Working with a Financial Advisor informs consumers that this new rule "only muddies the name game." It says that the rule tries "to clear up common misperceptions of consumers about conflicts of interest" but allows brokers to continue using different titles.

In fact, the brochure takes a shot at the rule by stating, "The new SEC rule fails consumers by not requiring the same disclosure standard for all financial advisors, not requiring that all financial advisors place their clients' interests ahead of their own, and not requiring that all financial advisors are fully qualified to help you meet your financial goals."

The FPA's president, James Barnash, used a softer tone than that of the brochure in saying, "The SEC approach to disclosure is a good starting point. However, we believe that additional guidance will help the public better understand how the advisory or brokerage arrangement works in practice - no matter how they are paid and who regulates them."

This new rule is important for the consumer to understand. In effect, it creates an exemption where some broker/dealers are clearly not considered investment advisors. Keep in mind that investment advisors are required to act as fiduciaries, meaning that they have a responsibility to put the interests of the client ahead of their own.

As background, this entire issue surfaced because many brokers no longer simply charge commissions for trading stocks or bonds. Instead, they offer certain fee-based accounts where they don't charge commissions on every transaction. Those accounts are similar to the services usually provided by the financial planner, but they don't include that important fiduciary responsibility. Recent figures put those accounts around the $300 billion mark: lots of money.

Incidentally, the disclosure referred to earlier must be prominent. Translated, that means it has to be on the first page of each set of documents the consumer receives, and probably reads as follows: "Your account is a brokerage account. Our interests may not be the same as yours. We are paid both by you and, sometimes, by the people who compensate us based on what you buy."

For anyone who has been using a broker in an advisory capacity, the key to the new rule is to look for these disclosures. It may sound strange, but many investors are hazy about the relationship that they have with their financial advisor. While the vast majority of brokers and planners of all stripes are ethical, the consumer must be aware of the workings of the relationship.

Of course, perhaps it goes without saying that if you are not getting precisely what you think you are paying for, it might be time to make a change in advisors.

Contact the FPA at (800) 647-6340 to order a free copy, or visit www.fpanet.org/public.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access