April 29, 2013
My viewpoint is that from a retail customer as defined in Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, seeking advice from a broker-dealer or investment adviser for personal purposes.
It is widely known that the financial service industry is under constant regulatory reform due to complexities in todays securities. However, reform in this specific area of the law concerning broker-dealers and investment advisers is unnecessary. Investment advisors and broker-dealers are currently operating under different regulations and this is not a bad thing. I suggest not completely harmonizing the law between broker-dealers and investment advisors, and in particular creating a uniform fiduciary standard for the two, because the duties and primary clients of broker-dealers and investment advisers are not the same. In addition, as discussed below, there are less costly alternatives to reach the primary goal of the Commission, which is to decrease the confusion among market participants in determining whether a financial professional is an investment adviser or broker-dealer, and whether they offer the same services and are subject to the same fiduciary responsibilities.
A broker conducts transactions in securities on behalf of others, a dealer buys and sells securities for his or her own accounts, and an investment adviser offers advice to potential investors about securities. While the Commissions studies conclude, and many people would agree, that the distinction between broker-dealers and investment advisors is blurred because of overlapping market functions, the traditional definitions of these financial service providers have stayed static. Thus, instead of the putting the burden on investors to distinguish between broker-dealers and investment advisers, some sort of mandatory disclosure could be instated. For example, the investment adviser or broker-dealer can be required to explicitly make known to a potential investor which title he or she possesses, be it financial adviser, broker, or dealer, and under which regulations he or she operates under prior to the particular transaction. In addition, when investment services would involve conflicts of interest, disclosure should be mandated, and force the investor to either consent or find another financial professional. This would not be burdensome for the professional financial service provider and place the burden on the broker-dealer or investment adviser to eliminate any confusion that exists with the retail customer. Once this is known to the potential investor, it is the responsibility of the retail customer to engage in some sort of due diligence before making his or her investment under the wings of a professional who offers financial service advice.
With that said, and the title of the professional financial service provider known, the general investor will probably not care to delve into the different regulatory schemes for the different financial service professionals. This creates a gap of knowledge between the retail investors and financial professionals concerning both the technical and financial aspects of investing, leaving room for client abuse. However, one cannot assume that this knowledge gap will be taken advantage of to the detriment of the retail investor. Businesses in the finance industry increase their value by being respected and trusted by customers for their exceptional efforts. As studies by the Commission show, most study participants express satisfaction with their own financial professionals, with whom they tended to have long-term relationships. Thus, trusting a professional with ones money is a very personal and intimate bond and one expects the professional to offer sound investment advice. The Commission cannot pick the investors that the investing public wants to work with or from making unwise investment decisions. Nevertheless, the SEC states that the regulatory schemes for investment advisers and broker-dealers are designed to protect investors through different approaches, and no studies suggest otherwise. Most important to the retail customer is that even if confusion exists regarding the responsibilities of certain financial professionals to retail customers, antifraud provisions and case law already provide for investor protection, making it unlawful for any broker-dealer or investment adviser to engage in any act, practice or course of business which is fraudulent, deceptive, or manipulative. Therefore, as long as the investor is being protected adequately, harmonization of regulations to eliminate confusion seems unjustified and costly.
Because an investment adviser is considered to be a fiduciary to his or her clients, he or she must act in the best interests of his or her clients in activities related to the investor-client relationship. On the other hand, broker-dealers, as the Commission concluded, are not bound to a fiduciary duty under federal law, yet are required to make suitable recommendations, and to disclose any conflicts of interest to a client. This to me, as a retail consumer as defined in Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, seems adequate and perfectly logical considering the types of investors that usually seek advice from financial service professionals. For example, investors with some sophistication in financial markets and significant amounts of money are more likely to seek the advice from a broker-dealer than an investment adviser because the broker-dealer can usually offer more types of investments. The less funded retail investor, on the contrary, will most likely seek a trustworthy investment adviser, in which to develop a long-term relationship with. In addition, and perhaps most important, is that courts generally find broker-dealers that exercise discretion or control over customer assets, or have a relationship of trust and confidence with their customers, are found to owe customers a fiduciary duty similar to that of investment advisers. Therefore, a uniform fiduciary standard is unnecessary because it might lead to broker-dealers avoiding conflicts rather than managing them, ultimately curtailing retail customer access to certain beneficial products and services, leading to decreased competition among financial service providers and higher costs to the investors.
Studies suggest retail investors do not fully understand the two standards of care that broker-dealers and investment advisers operate under, ultimately leading to confusion concerning whether the financial professionals are required to act in the clients best interest. However, so long as the retail investor is made explicitly aware that their financial service professional is a broker-dealer that can trade for its own account, they have an option to avoid such conflicts of interest and seek advice from investment advisers, who will generally earn more money from the retail investor if that clients asset base grows as a result of the advisers investment recommendations. This is a choice for the investor, who is fully capable of analyzing what type of financial professional he or she wants to work with. Thus, the nature and scope of duties owed to the retail investor should depend on the circumstances and arrangement between the retail customer and the broker-dealer or investment adviser.
Since retail customers are the ultimate concern here, it is important to note that both investment advisers and broker-dealers are subject to regulation and oversight already protecting retail customers. This fact remains whether or not the broker-dealer or investment adviser operates under one regulatory regime or two distinct regimes. The scope of obligations due to the retail investor should be expressed in agreements between the retail customer and the financial professional providing advice on an individualized basis. Therefore, regulators should not harmonize the regulatory requirements of broker-dealers and investment advisers and impose a uniform fiduciary standard that would subject a full-service broker-dealer to the same fiduciary standards as a registered investment advisor when providing personalized investment advice about securities to retail customers.