February 7, 2005
Weve watched with interest the discussion about whether clients are best served by a rule that allows brokerage firms to engage in relationships that my be confusing to their clients. While we applaud the decision to solicit comments, I do hope comments from other than those who might benefit from the current rule are carefully considered. The public and the profession deserve to know that they are being heard.
We am concerned about the SECs decision to allow brokerage firms to charge fees without being required to adhere to the disclosure and regulatory requirements that govern registered investment advisors and other financial professionals. While many financial companies and advisors stand to benefit from the rule as proposed, a decision to maintain the rule as we know it today will simply add to the body of confusion that plagues many client relationships.
What seems to be at issue here is less about compensation than how the public perceives the relationship they have with their advisor. When we ask clients, prospects and friends if they understand the difference between a fee-based brokerage account relationship and a financial planning relationship it is evident that many do not. In fact, they typically associate fees with financial planning and/or investment advisory services. From my experience, the public perceives that those who charge fees are bound by a set of regulations that hold them to a higher standard. And when fees are charged for a financial plan, the perception of that experience is carried forward in that relationship in the future. That is how the public thinks. They dont separate the financial planning element from the investment element.
It is widely known that many financial service organizations charge a nominal fee to produce a financial plan designed to establish a relationship of trust with the client. This trust is critical to the future success of the client. Yet the SEC is proposing that after that trust has been established, through strict disclosure and fiduciary standards, the investment element need not be governed with the same care by which the trust was established. The client does not understand there is a difference. The Three Little Pigs initially felt the same way about the Big Bad Wolf.
What we are asking clients to do here is to distinguish between the financial professional who initially begins the relationship as a financial planner or investment advisor and the one that is allowed to transition from that high standard to one that is engaged in the sale of a product. To believe that somehow a client can understand the disconnect is a stretch. We have learned over many years that clients want one thing: They want to know that the advisor whom they begin working with is the same one they end up with. They are not interested in changing horses in the middle of the stream especially if they dont know whether their new horse can swim.
Over the course of the past few years our industry has been inundated with new regulations because it has become clear that investors are confused. In fact, at great expense to the industry, it has been determined that investors are unable to distinguish between something as definite as different share classes. While we all agree that clarity was in order here, it seems somewhat disingenuous to assert that while investors cant differentiate between different sales fees they can somehow understand the more complex issue of what constitutes an investment advisor, financial planner and a broker.
We would suggest that some of that which is transpiring here is an attempt to avoid the disclosure that best serves the public. We would further suggest this is an attempt to allow some organizations the latitude to develop a business plan that allows some to play the game without the same liability that is required of most others in this profession. Lets not let the marketing agendas of some large organizations be the driving force in your decision. The ideal business plan would certainly appear to be one that allows access to investors with much less liability than is in the clients best interest. Is that what you really want to have happen? It seems that clients have been hurt too much and too often because corporate philosophy has too often measured their approach based on that. If weve learned anything from history e.g., poor corporate governance, mutual fund scandals, etc. it is that there should be more disclosure, not less. There should be more clarity and less confusion. Have we not learned anything? Do we really believe that the public can now sort through another complicated process?
We have every confidence that it is the intent of the SEC to do what is in the best interest of the public. It is your desire to ensure that clients know with whom they are engaged, but based on my experience we are confident that they do not. We 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 advisory firm with full disclosure. The public has been taught that paying fees will give them better guidance, more objectivity and a higher standard with which they measure their advisor. Clients deserve that and should be able to depend on that. Anything less than that is smoke and mirrors. We are asking the SEC to do the right thing and reduce the confusion. That is what is in the best interest of the public.
Terry P. Welsh, CFP , ChFC, CLU
Chairman of the Board
The Planners Network
The Planners Network