August 30, 2010
Thank you for giving the public an opportunity to provide comments and insight on your Study Regarding Obligations of Brokers, Dealers and Investment Advisers.
The Investment Adviser Act of 1940 is a simple and profound piece of legislation. In Section 202(a)(11), it provides a clear and succinct definition of an Investment Adviser: "Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities"
It goes on to provide a list of exempt entities, all of which are either already covered by different regulators, or are seen as needing to give investment advice only incidental to their business.
It is important to realize that the original intent of the Act, of what has become known as the "fiduciary standard", only applies to people or firms that give advice on the value of securities, not just any financial advice. We believe that the ongoing attempts by certain industry groups to re-define the Act, and to usurp the term "fiduciary standard", are misguided.
First, broker-dealers can never be fiduciaries. What is a broker going to do? Sell a stock to his client for no commission, or no mark-up? That business model can not exist in a fiduciary world. But it certainly has its place in our current landscape. The fact that brokers outnumber investment advisers 10 to 1 should give evidence to the popularity of the broker-dealer model. The SECs role should be to make sure broker-dealers play by the rules. For example, brokers using the term "Financial Advisor" is purposefully obfuscatory, and has indeed confused the public as to the true nature of their own broker's compensation model. Before the Merrill Rule and the Donaldson-led SEC, no one dared to call themselves an Adviser unless they were an Investment Adviser. Let's go back to enforcing the rules of the Investment Advisers Act to the letter.
Second, financial planning is an important aspect of personal finance, but 90% of financial planning has nothing to do with investments. Recommending that a client have his/her wills updated, or put away so many dollars per year toward retirement, while important, has nothing to do with investment advice, and hence has no place in the discussion of the fiduciary standard. Interestingly, 90% of members of the Financial Planning Association are not Investment Advisers, which we believe helps prove our point. You may wish to regulate financial planning as part of a broader consumer-protection agenda, but it should not be included as part of the investment adviser/fiduciary duty discussion.
To summarize, we believe that the best course of action for the SEC is to more clearly define, enforce, and defend The Investment Advisers Act of 1940, a uniquely elegant and foresightful piece of legislation, rather than to try to dilute or expand it to cover groups outside of its original scope and intent.
Thank you for your time and attention,