Updated: May 3, 2013 12:14PM
Originally published: August 8, 2005
When it comes to investing, whose advice should you trust? There’s a quiet controversy brewing under the surface of the financial services industry about the standards that govern brokers, brokerage firms, financial planners, registered investment advisers, Certified Financial Planners, life insurance sales people and others who hold themselves out as advice-givers to the investing public.
The controversy relates to more than the issues of fees, registration or supervision. It has a much higher ethical component that deals with the advisers’ responsibility to the clients they serve.
For purposes of this column, I’ll put the term “adviser” in quotes until there is a final definition from the Securities and Exchange Commission as to exactly what duties and responsibilities and standards all must meet.
Traditionally there has been a “registered investment adviser” who was obligated always to put the interests of the client first, to disclose any potential conflict of interest, never to be on both sides of a transaction, and to disclose educational background and any disciplinary history.
Standards didn’t apply to all
Those same standards were never applied to “stockbrokers,” whose required duty involved only recommending “suitable” investments to clients. Of course, reputable stockbrokers always put their clients’ interests first. That’s why it’s important to seek recommendations before you choose someone to handle your money.
But under the securities laws, the legal requirements are quite different, depending on whether you are registered as a “broker” or an “adviser.”
How does that impact the client?
Well, a broker might be selling securities -- stocks or bonds -- owned by his firm, and receiving money based on the sales price without disclosing the existence of a commission or the amount. That happens in marketing IPOs and in some secondary issues, or in transactions where the brokerage firm makes a market in the security and sells out of its own inventory. The client never knows how much money the broker is making on the deal -- and the undisclosed, but juicy commission may be an incentive that overrides the duty to the client.
These days it is becoming very difficult to distinguish between roles in the investment community. You’ve seen the commercials and advertisements that trumpet the financial “adviser” who shows up at the daughter’s wedding or the son’s graduation. That advisor might very well have been a “broker.”
In fact, many brokers don’t give actual individual advice but simply sell a management service for a fee. In 1999, the SEC proposed a rule that allowed brokers to offer fee-based accounts, without registering as investment advisers -- as long as the investment advice was “solely incidental” to their brokerage services.
The simmering issue bubbled to the surface when the Financial Planners Association filed a lawsuit against the SEC on April 28. The suit asked the SEC to require broker-dealers to be subject to the same rules and fiduciary standards as investment advisers: putting their clients’ interest first. That would require revisions to the Investment Advisers Act of 1940, which had for all these years exempted brokers from these fiduciary responsibilities.
The SEC’s 1999 revisions requiring brokers to register as advisers under certain conditions finally are scheduled to take effect in October.
The SEC is expected to take action with the arrival of its new chairman, Christopher Cox. That’s likely what prompted the Securities Industry Association -- the trade group for broker/dealers -- to make a public request that the SEC further delay implementation of those rules that will more clearly spell out the need for brokers to register as investment advisers when offering some services.
Know your adviser
Surely, the industry will come to some appropriate resolution to this issue. But it serves as a reminder to all of the investing public that you should know exactly what responsibilities your financial “adviser” has and how he or she is being compensated.
*For disciplinary histories go to www.NASD.org.
*For Financial Planner Registry go to www.CFPBoard.org.
*For Fee-only Financial Planners go to www.FeeOnly.org.
*For planners registered with FPA go to www.FPAnet.org.
You need to know whether you can trust your financial “adviser.” And until the rules are changed, you should ask about compensation, check references, and search registrations. That’s the Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.