|
 True
or false: Financial planner, financial consultant, investment adviser,
stockbroker -- these are all titles for people who provide essentially
the same types of services, right? True. So there's no need to concern
yourself about how they differ from one another, right? False.
Actually, there's a wide chasm between brokers and
investment advisers, though you can hardly tell if you just go by
their titles. That's because in recent years, brokers have been
recasting themselves as financial consultants, offering a slew of
wealth advisory and financial planning services, on top of their
usual job of buying and selling securities.
"Many would claim that the
brokerage industry deliberately makes this differentiation difficult
for the public by using such labels as 'financial adviser' and 'financial
consultant' for a role once called 'stockbroker,'" says Michael
Kitces, a certified financial planner and director of financial
planning for Pinnacle Advisory Group in Columbia, Md.
The difference is legal
Brokers are held to a different standard than registered investment
advisers. The latter must abide by the rules of the Investment
Advisers Act of 1940, which legally obligates them to act solely
in the best interests of their clients.
Brokers, meanwhile, are regulated by the National
Association of Securities Dealers, which imposes a "suitability
standard" rather than the stricter fiduciary standard. This
simply means an investment sold by a broker must be suitable for
the client. Critics say the standard is loose and allows brokers
wide latitude in recommending products that often serve the brokers'
interests as much as or even more than those of their clients. Proponents
say the NASD
rules are just as stringent as the SEC's, so brokers shouldn't
be subject to duplicative regulation.
Earlier this month, the Securities and Exchange Commission
overwhelmingly approved a 1999
proposal that officially allows brokerage firms offering fee-based
accounts to be exempt from registration and regulation as investment
advisers. The controversial decision drew approval from key congressmen
on the House Financial Services Committee, but the ire of financial
planners who say brokers continue to have an unfair advantage by
selling "lots of services with minimal liability," in
Kitces' words.
A bit of background
The SEC's ruling that exempts brokers from registering as advisers
actually upholds the law as stated in the Investment Advisers Act
of 1940. Brokers were exempted 65 years ago in part because they
were regulated under provisions of the Exchange Act, enacted in
1934.
So why resurrect this ruling? The SEC initiated the
proposal in 1999 in response to changes in the market place, in
particular the introduction of fee-based brokerage programs, which
changed the way in which brokers were compensated for their services.
Until fee-based programs came along, transaction fees made up the
bulk of brokers' businesses.
Last summer, the Financial Planners Association filed
suit against the SEC because even though the 1999 proposal had not
been approved, the brokerage industry was conducting business as
though it had. The lawsuit was put on hold while the SEC gathered
public comments on its proposal.
In the end, the SEC concluded that the fee-based
programs were not "fundamentally different from traditional
brokerage programs," and in fact afforded "important benefits
to brokerage customers." The fact that the programs generated
asset-based fees of between 1 percent and 2 percent rather than
transaction-based fees alleviated concerns the SEC had "about
the incentives that commission-based compensation provides to churn
accounts, recommend unsuitable securities and engage in aggressive
marketing of brokerage services."
|
