Subject: File No. S7-25-99
February 2, 2005
I have read with great interest the summary of the Commission’s deliberations on the reproposal of rules addressing the application of the Investment Advisors Act of 1940. I practice with an independent investment advisory firm in Dallas, TX, and am a CPA, CFP designee, and a CIMA licensee. I would like to comment on several specific raised in the materials published by the Commission.
Focus on Investors’ Needs
I think that the emphasis in this deliberation should be on the affect the re-proposed rules have on investors and their ability to discern – very clearly – the different regulatory regimes that apply to brokers and investment advisors and the fact that each is currently held to different standards of conduct. I would encourage the Commission to make sure these distinctions are clear in all communications - from both the brokerage firms and from individual brokers - when they are communicating with clients or prospective clients. Clarifying the roles and responsibilities of various types of advisors is, in my view, the most significant positive development that can come from this deliberation.
Investors do not, in my experience, distinguish between advisors based upon the types of firms that employ them or based upon their methods of compensation. They distinguish based upon the trust they have in a particular advisor, the types of services offered to them, and the quality of the advice they. Judging from the television advertising from brokerage firms, one can quickly see that brokerage firms are touting their services as “advisors,” talking about their “wealth management” services, and extolling the benefits of being involved in a client’s entire financial life. The message is clear and pervasive – these firms are providing holistic financial advice, which almost by definition extends beyond providing services that are “incidental” to brokerage services.
When I compete for new business with “financial advisors” from major brokerage firms, their pitch to individual clients is almost always focused on a team of professionals that are able to offer the client “comprehensive” advice, including tax planning, estate planning, asset protection, and other non-investment related services. Of course, their materials contain the obligatory disclaimer about “we don’t provide tax advice,” but go on to present tax planning or estate planning ideas to the prospective client.
Conference speakers from major brokerage firms talk about the next “wave of the future” – creating multi-disciplinary teams of advisors within their respective firms, because comprehensive services are what clients value the most.
How is an investor to figure all of this out, even with the disclosure proposed by the Commission?
One way the reproposed rule allows a broker-deal to avoid treating a client as an advisory client is if the broker dealer does not exercise investment discretion. I do not believe that this is a sufficient bright-line test.
While it may seem to be convenient line of demarcation, consider the fact that an individual may have multiple accounts, titled in the name of the individual client or in the name of a trust, partnership or other related entity. Some of the related accounts may be discretionary, others may not. How can a client distinguish between the services provided on a “discretionary” basis and those that are not? When does the advice fall in one bucket or the other? I fear that this may actually create more confusion, not less.
In our practice, we do not take investment discretion over many of our client accounts. Indeed, the majority of the client assets we supervise are not discretionary assets, and yet we are still subject to the requirements of the Investment Advisors Act.
To me, this is not a workable proposal. The applicability of the Advisors Act should not be determined by the level of discretion taken by the advisor.
The second exception is provided if the services are “solely incidental” to the conduct of the broker-dealer’s business. I have no disagreement with the proposed “broader” interpretation of the meaning of solely incidental. A narrower interpretation is too limiting.
However, I believe that there are some pretty broad guidelines that can be drawn and used by to differentiate services that not incidental. Tax advice is not solely incidental to the broker dealers’ business, nor is estate planning, or insurance planning, or cash flow planning. I cannot come up any way to include these services in a definition of “solely incidental,” no matter how many prominent disclaimers are offered to the client along with the advice and recommendations.
Many types of investment advice could reasonably be construed to be solely incidental, but not the non-investment related services. Those services place the provider in a different role when counseling a client. If such non-incidental services provided by an employee of a brokerage firm, that employee should be held to the same standards that I am.
The Commission has asked for comments on financial planning and whether they should be specifically defined as not being “solely incidental.” I believe that this would be appropriate, but it should not be based upon a narrow definition of financial planning activities. Preparing a specific financial planning report or an analysis to determine the sufficiency of retirement assets is not the only indication that financial planning advice is being offered, nor is the existence of separately-stated compensation.
A broad set of guidance can and should be developed, perhaps in conjunction with various professional organizations, which would delineate meaningful standards about the services that go beyond “incidental.” At least one major brokerage firm is advertising that a very high percentage of its employees are CFPs, clearly implying that it can provide financial planning advice as part of its services. A firm making such claims should not be able to avoid the application of the Investment Advisors Act.
Many times, in my experience, brokerage firms “give away” financial planning advice as a way to build their investment business. If they choose to give it away, they should be required to meet the same fiduciary standards I am required to meet as an advisor.
I believe that the most appropriate thing for the Commission to do is completely do away with the current rules governing applicability of the Investment Advisors Act and start over again. The current rules, even with the proposed modifications, do not work well and reflect the most current practices in the industry and profession.
Absent that, however, I believe that there should be several overriding principles guiding the Commission’s decision:
Provide a clear, concise way for investors to be identify the services they are receiving and the standards of conduct that are applicable to the advice they receive and their advisor; and
For advisors who provide comparable services but happen to be employed by different types of firms, make the standards the same.
Thank you for your consideration.
J. Richard Joyner
President, Private Wealth Management
Tolleson Wealth Management
5500 Preston Road, Suite 250
Dallas, TX 75205
Phone (214) 780-2512
Fax (214) 780-2513
The information contained in this transmission is intended only for the individual or entity named above, and may contain information that is privileged, confidential and/or exempt from disclosure under applicable law. If you are not the intended recipient, or the employee or agent responsible to deliver it to the intended recipient, you are hereby notified that any disclosure, copying, distribution, or use of the information contained herein (including any reliance thereon) is STRICTLY PROHIBITED. If you received this transmission in error, please immediately contact the sender and destroy the material in its entirety, whether in electronic or hard copy format. Thank you.