August 23, 2004
I have some comments on the proposed new rule 202a11-1 under the Investment Advisers Act , Certain Broker-Dealers Deemed Not To Be Investment Advisers.
My understanding is that the Investment Advisers Act was designed to protect the public when dealing with professionals giving investment advice. Broker dealers have been giving sales pitches disguised as objective advice for some time, at the expense of their naive clients.
If anything, we need to provide further protections for consumers from the predatory practices of broker-dealers, not lesser protections.
When you re-opened the comment period for this proposed rule, you specifically asked for comment on three questions:
1 Do current fee-based programs more closely align the interests of investors with those of brokerage firms and their registered representatives than do traditional commission-based services?
I believe that current fee-based programs offered by brokerages do NOT align the interests of brokerage firms and their registered representatives any better than traditional comission-based services. Current fee-based programs offered by brokerages tend to be in the category of wrap fees. Wrap fee programs tend to not be beneficial for at least two reasons. First, the fees tend to be excessive. Second, because the transaction fees are built in to the service i.e., no separate transaction fees are charged, the broker actually has a disincentive to recommend what would generally be beneficial transactions. The nature of this disincentive is the fact that the broker would need to incur any transaction expenses themselves.
2 If the Commission determines not to adopt this rule as proposed, what would be the practical impact on broker-dealers?
I believe that broker dealers might be somewhat less inclined to abuse their fiduciary duty i.e., if they have a fiduciary duty, they are more likely to act like it.
3 Should we require broker-dealers who would seek to rely on the rule nevertheless to register if they market fee-based accounts based on the quality of investment advice provided? For example, should brokers be precluded from using certain terms like investment advice and financial planning in advertising these services, or is prominent disclosure that an account is a brokerage account sufficient to alert an investor to the nature of the account?
Perhaps a good compromise is to allow the exemption, but to require a prominently advertised statement similar to the following:
NOTE: We are NOT investment advisers and any investment advice we should happen to render should be considered part of a sales solicitation. We have no responsibility to base our recommendations on sound reasoning or accepted investing theory. We have no responsibility to consider your best interests. You should assume that our only motive for any investment advice we should happen to render is to increase the commissions/fees you pay us. If you seek advice that is well grounded and in your best interest, you are encouraged to seek out an investment adviser, rather than a broker/dealer or registered representative thereof.
A disclosure similar to that above would clearly lay out the facts for the consumer. We have to remember that the primary purpose for all of these rules is to protect the consumer, NOT the interests of the broker/dealers.
I urge the SEC to withdraw proposed new rule 202a11-1 under the Advisers Act immediately.
If the rule is not withdrawn, I urge the SEC to require a clear conspicuous disclosure indicating that the broker/dealer has no fiduciary responsibility towards the client and that the broker/dealers advice should be considered part of a sales pitch.
Eric E. Haas
Altruist Financial Advisors LLC
3754 65th St
Holland, MI 49423-9739