January 15, 2005
The plethora of consumer advertising on television touting brokerage firms as personal financial advisors One Client at a Time, etc. blurs any possible distinction in the publics mind between a broker and a financial advisor. SEC definitions and brokerage firm disclosure are not going to be successful in clearly separating a broker exempt from registration from a financial advisor NOT exempt from registration.
At our fee-only financial planning firm, it is very clear from initial meetings with prospective clients in our conference room that they, in the past, looked upon their broker as their financial advisor. Only after some time working with the broker did they realize that the broker was selling inappropriate products to them under the guise of good financial planning moves. Thus, the broker had ostensibly acted as a financial planner, and then switched hats to make the sale and get the commission.
Innumerable prospective clients have come in and asked as one of their first questions, What do you think of annuities? That is all they heard from their broker who said that they needed annuities as the solution to their long-term personal financial plan.
Question: How should the SEC draw the line between financial planning services that are incidental to brokerage and those that are not? Can such a line be drawn?
My take is that it is virtually impossible to draw a distinction as to what is incidental.
Next question, Do you think the SECs approach, to interpret financial planning as not solely incidental to brokerage services, is workable?
No. I feel strongly that the public will be very confused by their broker wearing two hats: one where he/she is a financial planner with a fiduciary responsibility, and then in the next moment, he/she is a broker that is going for the jugular -- fiduciary responsibility be damned.
Next question: Do you think there are other marketing terms that a broker could use to provide similar services and thereby evade restrictions on use of the term financial planning?
Yes, evasion is very probable. The public receives so many messages in a given day that consumers end up being confused. The level of understanding of esoteric differences between a broker and a financial planner is totally lost on most people that come into our office. Even though we tell prospects that we are fee-only, they still ask us if we get commissions like a broker because brokers advertise fee-based services, which sounds very much like fee-only services. Further, some brokers offer fee-only services some of the time, which they tout to the public, but then they offer commission-based services at other times. Clearly, an advisor is fee-only or not fee-only, but cannot be fee-only some of the time and not at other times. This is an example of the rapid blurring of terminology that confuses the public.
Next question: Should the SEC also or alternatively attempt to identify specific types of financial planning services that would or would not be incidental to the brokerage business?
No. As soon as the SEC comes up with a list of definitions, brokerage firms will introduce new products or services that will circumvent the definitions. Compliance within the brokerage firms will be difficult, and SEC enforcement would be equally difficult.
The SEC has proposed a regulation that would require brokers, in connection with fee-based brokerage programs, to prominently disclose in advertisements and account statements that the account is a brokerage account and not an advisory account. It would also require them to disclose that as a consequence, your rights as an investor and the brokers duties to you, including the scope of its fiduciary obligations, may differ. They would also be required to identify a person at the brokerage firm with whom you can discuss the differences. Do you believe this would be adequate in helping the public understand the differences between brokers and financial planners?
No. The distinction is an esoteric concept and the information would undoubtedly be buried in footnotes or small text, which the public will not read. It is difficult enough to get prospective clients to read our Form ADV Disclosure Statement, which is an 8-page narrative-style document that we use under the brochure rule. We purposely print the Form ADV Disclosure Statement in 12-point font and have them sit and read it in our conference room before we sign an agreement with them.
Next question: Will the above disclosures make sense if a broker continues to refer to its agents as financial consultants or financial advisors?
No. As I have stated before, the meaning of the disclosures will be lost on most consumers.
In summary, the only viable solution in todays fast-moving world is to have brokers register as financial advisors and provide complete compensation disclosures in their Form ADV, Part II, or equivalent brochure. In short, keep it simple.