January 12, 2005
I do not have a problem with broker/dealers charging fees as a price for their sales efforts. However, I beleive that by marketing and advertising financial advise to the public, broker/dealers are going beyond solely incidental advice and should be held to the same requirements as registered investment advisors.
Lets not confuse the issues. Pricing models are not the problem with the exemption rule, disclosure of conflicts and liability in giving advise are the issues.
The current problems with the exemption rule are two fold.
1. It has confused the public, and thus potentially harmed them. A lack of disclosure
2. It has created an unfair competitive advantage for Broker/Dealers. An unfair competitive advantge
It is not uncommon to see financial advisor, finacial councilor, or financial planner on the business cards of some broker/dealers, this is clearly not a solely incidental practice. It is not uncommon to see broker/dealers asking or advertising to provide financial planning or advice to the public this is clearly not solely incidental. The current broker/dealer exemption has confused the public. It has blurred the eyes and the minds of the public. Today the public does not know the difference between investment advisors and broker/dealers. This is clearly not the intent of the SEC rule, yet that is what I believe has been allowed to happened.
I beleive, that brokers should be required to be registed as financial advisors if they represent themselves in any way as advisors, councilors, or planners. Furthermore, I think the name broker/dealer should be clearly stated in their job title. In addition, when giving solely incidental advise, broker/dealers should still be required to disclose their conflicts in writing. Namely that they are allowed to represent themselves above the needs of their clients as long as the recommended investment is appropriate for the client.
Take the example of an investor wanting to save for a childs college education. In such a situation, a 529 plan may be an appropriate investment. If the recommended 529 plan is outside the investors state of residence, is it the investors best option? Possible not, if all else being equal, it means the investor could miss out on a state tax deduction for not investing in the 529 plan of the investors state of residence. Yet it is approprate for a broker/dealer to advise the purchase of such a 529 plan. However, a registered invetment advisor selling an out of state plan could potentially be in breach of fiduciary duties for recommending such a plan. Is this fair? I think not. Does this harm investors? All else being equal, it does. He loses a possible state tax deduction.
The current broker/dealer exemption allows situtions like this to occur every day. I beleive that by marketing and advertising financial advise to the public, broker/dealers are going beyond solely incidental advice and should be held to the same requirements as registered investment advisors. Broker/Dealers should be prohibited from using the terms advisor, councilor or planner on business cards and advertising material. Broker/Dealers should be required to disclose that they are allowed to represent themselves above the needs of their clients as long as the recommended investment is appropriate for the client and that their solely incidental advise may not be in their clients best interests, mearly appropriate.