January 26, 2005
I believe that while having discretionary authority to trade for a client serve as a test for whether registration under the Investment Advisors Act of 1940 is a good start, I do not believe that the proposed rule goes far enough.
The Staff conclusion that a broker can act as a broker, whether executing trades for a client for a commission or on a fee basis is reasonable and well thought out. In fact, an investor may or may not be better off paying for trading on a fee basis.
The Staff comments that brokers have historically provided investment advise to their clients as part of their service. This is clearly correct, as far as it goes. This advise has traditionally been to recommend the purchase and/or sale of a particular security or other investment product. The problem is that many broker-dealers advertise that they perform service which more closely resembles services performed by financial planners and other investment advisors who are regulated under the Investment Advisors Act.
Certain steps, such as determining risk tolerance and investor time horizon, are common to,and required of, both registered representatives and financial planners. I believe that these steps are clearly incidential to the work of a registered representative. Developing asset allocation models, developing income and estate planning strategies, education planning, risk management, etc. go far beyond being incidental. When these services are being provided to a client, for a fee, the registered representative is, in fact, functioning as a financial planner and should be subject to the same fiduciary standard as are planners under the Investment Advisors Act.
The advertisements of the broker-dealers refer to their registered representatives as financial consultants, financial advisors, and similar terms designed to confuse the investing public into believing that they are dealing with financial planners and investment advisors who act in a fiduciary capacity. I receive at home at least one invitation a week to attend a seminar on retirement planning, wealth management, etc. The presenters are always described as consultants rather than as commission based brokers. Clearly, there is a major attempt being made by large broker-dealers to position themselves as consultants and advisors. They are not promoting flat fees for stock trading in lieu of commissions. They are holding themselves out as being in the consulting/advisory business.
I believe that there should be a second bright-line test in addition to the discretionary trading test. It should be a test of holding out. If a broker-dealer or insurance company holds itself, its agents or its registered representatives out to the public as consultants or advisors, it should be required to register under the Investment Advisors Act. Furthermore, since the Staff has indicated a belief that the distinction should not be based on the method of compensation received by the broker-dealer, this should likewise not depend on the method of compensation.
By holding broker-dealers to the same standards as registered investment advisors if they exercise discretionary authority over client accounts OR if they hold themselves out as consultants or advisors, the protection of the investing public would be greatly protected. Although registered representatives are held to high standards, these standards are simply not as strict as the standards to which registered investment advisors are held. The investing public is entitled to know that all consultants, advisors and planners offering investment advise are subject to the same high standards.