August 23, 2004
Full and fair disclosure of the responsibilities of a purveyor of financial products is required to ensure that the consumer fully understands the nature of the relationship he is entering into. The SEC, NASD or other regulatory agency can not be expected to decide which business model is effective, but consumers expect the government to regulate this industry and ensure that they, consumers, are given the information needed to make a fully informed decision.
If a consumer goes into a car dealership to purchase a car, the consumer does not expect the sales person to make sure that the consumer gets the best car for their needs at the best possible price. However, this expectation does exist when buying financial products. The individual investor expects that the person selling the financial product is looking out for the investors best interest.
The current, arcane laws governing the disclosure and responsibility of Financial Advisors and Broker Dealers are not in concert with the expectations of todays consumer. In todays economic enviorment, the lines between the traditional broker-dealer and the financial advisors is, at best, blurry. Several factors contribute to this blurry line and confuse the individual investor.
1. The vast majority of broker dealers no longer call themselves Stock Brokers as they did 60 years ago. In their own marketing attempts to win customers, the broker dealers call themselves Investment Consultants, Personal Investment Adivsors, etc. This language is used specifically to leave the consumer with the impression that the primary services being rendered are investment advise and the sale of securities to match their financial needs. The true purpose of the broker dealer, either to give advise, sell securities or both, is not relevant. The fact is that the broker dealer is actively marketing the giving of advise to the consumer. This is no different than a Financial Advisor.
2. The primary reason that investors use full service brokerage firms broker-dealers today is the investment advice provided. With the ease of access to discount brokerage services, an investor who soley wanted trade execution would use one of the many discount brokerage services. By paying the much higher fees either commision or annual fee, the investor is implicitly choosing to pay for both the advice offered and trade execution. The traditional Financial Advisor is paid, among other things, to analyze the current portfolio and recommend specific actions to the client. The primary difference between the two roles is in the ancilary services provided - income tax analysis, insurance needs analysis, etc.
3. When an investor opens an account with a broker-dealer, the investor discusses their risk profile, investment experience and investment goals. These same concepts are discussed in the traditional Financial Planning relationship. Since both ask the same types of questions, the consumer is left with the impression that the answers provided will be used when providing investment advise. If the broker-dealers use this information to make appropriate recommendations, they are, in fact, providing advise. If the broker-dealer analyzes the investors current holdings and suggests changes, the broker-dealer is providing advise. The timing or type of payment is not relavent. The fact is that the advise is being sought and provided. Even the quarterly statements of most major broker-dealers give the impression of adivse. They show breakouts of asset classes, investment sizes, cost basis, etc. If the only role of the broker-dealer was to execute trades and recommend hot securities, this information would not be demanded by the customers of the firm, nor provided by the firm.
In summary, the financial advise landscape has changed dramatically over the last 60+ years since the Act was passed. The lines that differentiated the sale of securties and other financial instruments from the sale of financial advise have merged or been erased. The changes that have taken place have helped the consumer gain access to the financial markets in ways that could not be imagined when the original rules were enacted. At the same time, the consumer is more confused than ever because of this blurring of roles.
In any agreement, clear disclosure of what will be performed is essential. The rendering of financial advise, with all its complexities, is no exception. If the SEC and other regulatory agencies feel that the providing of advise is ancillary to the sale of a security and this proposal is passed, I feel that this should be disclosed to the consumer. A statement such as The adivse rendered by the sales person named below is strictly ancilary to the sale of a security and should not be considered in the best interest of the client should be required. All this statement does is clarify and reiterate to the consumer that they are NOT paying for investment advise but are really paying for the execution of a trade. The accurate disclosure of services to be rendered is a simple question. If the goal of the person being paid is to sell, that person should say so. If the goal of the person being paid to provide advise, that person should say so. If the service providor is unwilling or unable to clarify the services provided, the consumer has a right to know that as well.
The heart of the question, then, is the disclosure to the consumer and the responsibilities of the service provider. If the ultimate goal of the SEC is to protect consumers by ensuring the accuracy of information, then disclosure to the consumer must be made relating to the role of the service provider.