THE BLOG
09/16/2010 01:19 pm ET | Updated May 25, 2011

A Salesman in Advisor's Clothing

Do you know whether the person you rely on for advice about investments is a broker or an investment adviser? Do you know if he or she is legally required to act in your best interest when recommending securities? If you are like the vast majority of Americans, you have no idea. Indeed, it may never have occurred to you that your trusted "financial advisor" is really a securities salesperson in adviser's clothing.

That's what a survey released today by the Consumer Federation of America (CFA), AARP, the North American Securities Administrators Association, and leading investment adviser and financial planning organizations has found. Investors don't understand the differences between brokers and investment advisers and don't realize they are subject to different regulatory standards when they provide advice.

If investors are confused about these differences, they are crystal clear in their beliefs about what the standards should be. The survey shows that over 90 percent of U.S. investors think that "a stockbroker and an investment adviser (who) provide the same kind of investment advisory services... should have to follow the same investor protection rules." In addition, nearly all U.S. investors (97 percent) agree that "when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice."

The survey is particularly relevant now, as the SEC is conducting a study -- mandated by the Dodd-Frank regulatory reform act -- of the standards that apply to brokers and advisers when they recommend securities. The survey responds to two of the questions Congress directed the SEC to answer as part of that study:

  • Whether retail investors understand that there are different standards of care for investment advice by brokers and advisers; and
  • Whether the existence of different standards of care is a source of confusion.

Like similar studies conducted previously, our survey confirms that investors are clueless both about the differences between brokers and advisers and about the different standards of care that apply when they give investment advice.

This lack of understanding is not because investors are stupid; it is because, bluntly stated, the policy itself is stupid. No one in their right mind would create a system in which individuals who call themselves by titles and offer services that are indistinguishable to the average investor are subject to two different standards when they do so. But this is precisely the world that SEC policy over the past two decades has helped to create -- when the agency allowed brokers to call their sales reps financial advisers and financial consultants without regulating them as advisers and allowed them to offer services such as financial planning and investment planning without regulating those services as the advisory services they clearly were.

Now, Congress has given the agency a chance to fix those past errors -- by imposing the Investment Advisers Act fiduciary duty on all financial professionals when they give investment advice or recommend securities. But that policy still faces a significant headwind of industry opposition. Although the mainstream broker-dealer groups have come around to the point that they now embrace the concept of a fiduciary standard for advice, they advocate a rules-based approach that, if adopted, would vitiate the fiduciary standard. The insurance trade associations, meanwhile, continue to argue, disingenuously but vigorously, that investors would suffer if they were held to a fiduciary standard when recommending securities. This is a view that, as our survey results make clear, investors themselves overwhelmingly reject.

What remains to be seen is whether the SEC will capitalize on the opportunity it has been given to at long last put investors' interests first and hold brokers and investment advisers alike to the full Investment Advisers Act fiduciary duty when they give investment advice and recommend securities. There are positive signs. The administration and leaders at the SEC -- including SEC Chairman Mary Schapiro -- supported legislation to impose a fiduciary duty on brokers when they give investment advice and recommend securities.

The SEC needs to follow through and make that promise a reality. Investors expect all investment professionals, regardless of what they call themselves, to act in their best interests when they recommend securities. It is time for the rules to catch up to investors' reasonable expectations.