At the end of the day Monday, the comment period officially closes on the Securities and Exchange Commission's (SEC) study of the standard that should apply to brokers when they give investment advice and recommend securities. Yet as of last Monday, with only one week remaining on the comment period, only 32 individual investors had submitted comments out of 1535 filed. This is arguably the single most important investor protection issue for retail investors, but unless they make their voices heard, this issue is likely to be decided without their input.
Most investors choose to rely on a professional - a broker, a financial planner, or an investment adviser - to help them make investment decisions. These investors rely heavily, if not exclusively, on the recommendations they receive from these professionals. Surveys show, for example, that the typical mutual fund investor does little if any additional research on the funds that are recommended; instead, they do exactly what their broker or financial planner or investment adviser suggests, without second-guessing that recommendation. This makes investors extremely vulnerable, particularly given the conflicts of interest that pervade the securities industry and investors' difficulty in distinguishing between sales- and advice-based services.
What many investors don't realize is that even though the services investment advisers and broker-dealers provide are often virtually indistinguishable, they are regulated under different statutory and regulatory frameworks. Investment advisers are subject to a fiduciary duty to act in the best interests of their clients and to provide disclosures to clients regarding conflicts of interest. Brokers do not have this fiduciary duty. Instead, they are required to make recommendations that are generally "suitable" for the investor.
Under this lower standard, brokers are free to recommend a particular product that provides the broker with higher compensation, even if a different product would be better for the customer. And they don't even have to disclose this conflict of interest to the customer. To add to the confusion, brokers have encouraged investors to rely on them as advisers, by giving their salespeople titles like "financial advisers," offering extensive advisory services, such as investment planning, and marketing their services based on the advice offered.
The recently passed financial reform bill allows the SEC to end this confusion and require all professionals who provide investment advice, whether they are brokers, financial advisers, or investment advisers, to meet the same standard of investor protection. But before the SEC can adopt these new rules, the law requires the agency to conduct this study. Those not currently subject to a fiduciary duty have made a concerted effort to submit their comments. Unfortunately, most investors appear to know nothing about this proposed change.
On several of the issues addressed by the study investors should be able to add valuable insights. They can explain how confusing they find the different titles used by brokers and investment advisers, such as financial advisor, financial planner, and investment adviser. They can offer their views on whether services that sound similar, if not identical, to the average investor - services like investment planning, retirement planning, financial planning, and advice about investments - should be subject to the same standards. They can tell the Commission what they believe the appropriate standard for such advice should be. In short, do they want all those who provide investment advice to have to act in the best interests of their customers? We believe the answer is obvious.
The dramatic changes that brokers have made in their business model have rendered the old regulatory distinctions obsolete. Brokers have worked hard to convince investors to rely on them as trusted advisers. It is high time they were regulated accordingly. The SEC has a golden opportunity to end investor confusion by requiring that all who offer investment advice to act solely in the best interests of their clients, without regard to their own interests, to take steps to avoid and minimize potential conflicts, and to disclose any conflicts of interest. It can't happen soon enough.