So, I ask you, what's your broker doing? Is he/she a salesperson, a financial consultant, what?
Would you believe that a survey from the Consumer Federation of America, backed by the Zero Alpha Group, says that some half of the investors that responded believe their brokers offer financial advice or simply provide help with sales of securities. That pretty much tells us that investors aren't sure what their own brokers really do.
Understand that although brokers many times refer to themselves as advisors, they aren't regulated as advisors; in other words, they aren't thought to have a fiduciary responsibility to clients as registered investment advisors do.
A few months ago, I wrote about this spate between the Securities and Exchange Commission and the Financial Planning Association, whereby the Association actually sued the SEC. You see, there is a rule on the books that was proposed by the SEC in 1999 and which never finalized a broker's advisory capacity. For the most part, it says that such brokers weren't covered by the rather strict Investment Advisers Act which governs all other financial advisors as long as the advice offered clients was deemed "solely incidental" to the brokerage services offered.
Barbara Roper, director of investor protection at the CFA, can sum this up in a comment. "The fact that investors don't understand that brokers are salespeople is a direct result of two decades worth of decisions by the SEC that have allowed brokers to remake themselves in the image of advisors without requiring them to comply with the investor protection rules that govern advisors."
Actually, the CFA survey shows that 28 percent of investors say that the broker's primary service is offering advice while another 25 percent claim that the advice is as important as offering sales-transaction help.
Now, catch this. In response to the question of whether a stockbroker and a financial planner who provide the same kind of investment advice services should have to follow the same investor protection rules, a whopping 91 percent nodded in the affirmative. What's got a lot of people caught up in their underwear is that more and more brokerage firms seem to be offering financial advice and wealth management services, but are still not governed by laws requiring them to put their clients' interest first. Why then should investment advisors be deemed under the law as fiduciaries for their clients while brokers are held to what many believe is a lower standard of responsibility?
Of course, in all fairness, if you ask the Securities Industry Association for their opinion, you will find that that they feel financial planners are generally small shops with little oversight but the broker has dozens of layers of supervision. A spokesman for the Association says that the body of regulations for broker-dealers is every bit as comprehensive, if not more so, that those relating to investment advisors.
It's a nice bit of tussle and to a journalist, it can become almost a column annuity. Supposedly, the SEC will render a decision within the next month and then the fighting could begin all over again. In the meantime it's a story that just doesn't go way. I love it!
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