February 7, 2005
CHAIRMAN OF THE
SECURITIES AND EXCHANGE COMMISSION
UNITED STATES OF AMERICA
Monday, February 07, 2005
Subject: File No. S7-25-99
The proposed regulation if fatally flawed because it neither serves the public nor professional advisors offering investment advice. Further the proposed rule is being piled onto an antequated Investment Advisors Act, now 65 years old and ripe for
I think the emphasis in creating a permanent rule should be on the effect these rules have on investors and their ability to clearly discern the distinct regulatory regimes that apply to brokers and investment advisors today - including the fact that each is currently held to different standards of conduct. I call on 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 dont, in my experience, distinguish between advisors based upon the types of firms that employ them or based upon their methods of compensation. They distinguish mostly upon trust they have in a particular advisor, the types of services offered to them, and the quality of the advice they receive. 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 clients entire financial life. The message is clear and pervasive these firms are providing holistic financial advice by definition extends beyond providing services that are incidental to brokerage services.
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 dont provide tax advice, but go on to present tax planning or estate planning ideas to the prospective client.
How will investors figure all of this out, even with the disclosure proposed by the Commission?
One way the proposed 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 believe that this is flawed.
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, all the client assets we supervise are not discretionary assets and yet we are still subject to the FULL 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-dealers 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 certainly 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 a 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 and all other Registered Investment Advisors are 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 primarily because it focuses on investment and not financial planning advice. For example, one could offer college planning and be exempt from the Act, but as soon as a financial planner discusses and investment with a client, he or she must be registered. Furthermore, banks and attorneys giving the exact same advice as a financial planner are exempt from filing as a Registered Investment Advisor. Different people, same advice, but different rules and standards. This does not serve the public or the regulatory environment.
I believe that there should be several overriding principles guiding the Commissions decision:
Provide a clear, concise way for investors to be identify the services consumers are receiving. Clearly and concisely state the standards of conduct that are applicable to the advice they receive and the standards met by their advisor. The best solution is for all parties offering any investment or financial planning advice to be bound by the exact same rules. The Commission needs to clarify, simplify and standardize these rules. A double standard will only serve to leave the door ajar to more scandals and further violate the trust of investors. Anything short of a singular clear standard, means that we have shortchanged the public.
Steven D. Wightman, CFP, CCPS
Life Advisor specializing in money