August 23, 2004
The investment Advisor Act of 1940, was established and, is continually, enforced to protect consumers by providing a list of standards and responsibilities to those who give advice to the general public.
There are exceptions to this rules, such as lawyers, accountants, and engineers because their advice is considered incidental and in the course of achieving the engagement for which they are hired. These professions are being hired for services outside of the financial advice. Furthermore, these professions have profession guidelines and fiduciary responsibilities that are enforceable by law, hence adhering to the IA of 1940 would be redundant and burdensome.
For Broker/Dealers, the argument is that their job is transactional, they buy and sell for the client, on the clients order, but this is an old and outdated argument. Due to the complexity of the business of investing and investments, as well as, the increased awareness by consumers clients they are now far more engaged in asking for and obtaining advice about investments and investing.
Due to this changing environment, broker/dealers are no longer simply middlemen helping to facilitate buy and sell orders. They are now asked to give advice about investing, retirement, college educational costs, and so on. Consumers are now going to broker/dealers to get advice first and the transaction is now secondary or incidental. In many cases, the fact that the broker/dealer can execute the transaction without having to further burden the client is merely a convenience and considered value added to the client for the fee that they are being charge.
The fee, or method of compensation may be linked to the transaction, but the customer is paying for the advice. Without the advice and recommendations of the broker/dealer there would be no transaction.
Therefore, broker/dealers are investment advisors, just like those who must adhere to IA 1940. For this reason the broker/dealer exemption should be revoked.
Lastly, and most importantly, does the consumer make a distinction between an IA and a broker/dealer? To the consumer is there a difference? Why should a consumer who hires an IA receive higher standards and protections than those consumers who hire broker/dealer?