February 6, 2005
TO THE SEC:
There is a substantial increase in advertising over the last few years by large, wire house firms proclaiming the benefits of financial planning for their clients. You can be sure this is the result of their marketing departments having conducted extensive research and consumer focus groups to determine what the public is looking for today. How is this financial planning being delivered? I encourage you to conduct your own consumer
focus group meetings with average investors randomly selected. I think you will discover what I have experienced when I asked my clients, prospects and friends if they understand the difference between a fee-based brokerage account relationship and a financial planning relationship. They do not understand and in fact, typically associate fees with financial planning and/or investment advisory services.
A common scenario I have heard from new clients who had been using a broker dealers fee-based trading account, is where, after an initial financial plan was developed for a nominal fee through the firms Registered Investment Advisor Representative, the broker placed them in a fee-based account to carry out the implementation of investments. The consumer thought the relationship with the broker in the fee-based trading account
was a continuation of the financial plan done under the Registered Investment Advisor division of the broker dealer. This is sometimes known in an industry as a loss leader. We in the financial services industry, including the SEC, have little concept how uninformed the average consumer is on these matters, and how vulnerable they are to deception. The consumer does not understand, nor do they seek out advice that is incidental.
In either a broker or financial planner relationship, the consumer typically seeks the advice of a professional and assumes the fee or commission they pay is for advice and direction and/or implementation. When that advice is for the selection of an appropriate investment, that advice in incidental to the brokers duties and obligation to the client relationship. Consequentially, the standard the broker is held to is one of suitability.
Was the investment suitable for the client? If, however, the client is led to believe they are engaging in a financial planning relationship with application beyond the suitability of a particular investment, based on trust and involving advice on a range of planning issues with long-term implications, the standard should be one of a fiduciary and require full and complete disclosure. A fiduciary relationship is warranted because financial planning advice is far more consequential to someones financial future than recommending a bad investment. Further, without full and complete disclosure and an understanding of the engagement, the public has no way of knowing if the advice being given is within the scope of knowledge and expertise of the advisor.
I dont understand how the SEC can draw a line between financial planning services that are incidental and those that are not incidental. As previously stated, television is full of ads by broker dealers targeting a financial planning message to the public void of any disclosure that financial planning is only incidental to the brokerage services. What
would that mean to someone if it were to contain such a disclosure? Is a secure retirement, or philanthropic plan, or wealth management incidental to them? I suggest in the mind of the consumer the opposite is true: That
the purchase of an individual security is incidental to their overall planning. What message are we, as a regulated industry, sending the public, if you allow some firms to say that the financial planning process is incidental to the products they buy, rather than the products you buy being incidental to the financial planning process?
I believe the phrases financial planning and financial planner and investment advisory and investment advisor and financial advisor should carry with them a fiduciary status and should only be available under a registered investment advisor firm with full disclosure.
The form of compensation for a broker may either be commissions or fees based on assets. That is not at issue here. However, giving a broker any of the titles listed above is confusing to the public. Stating that they do financial planning as part of the compensation without any disclosure is a disservice to the public.
The public should absolutely, unequivocally understand when they have engaged an advisor in a financial planning relationship. A relationship involving a high level of trust with the power to either transform their lives and futures, or, in the hands of an unethical or unqualified practitioner, to cause them serious long-term harm.
This is your opportunity to recognize a new profession that is having a tremendous impact on the lives and futures of a growing segment of the public. I encourage you to remember the average consumer who has no voice and will ultimately benefit or be ill served by your decision.