September 20, 2004
Comments on Proposed Rule:
Certain Broker-Dealers Deemed Not To Be Investment Advisers
Release Nos. 34-42099 IA-1845 File No. S7-25-99
I object to this proposed rule and request it be withdrawn.
I am a fee-only investment advisor who converted from a registered representative with a major brokerage firm. I am a member of the Financial Planning Association and the National Association of Personal Financial Advisors. I have been on both sides of the fence and feel the unspoken intent of this proposed rule is to further blur the distinction between a person providing advice and one selling product without increasing the liability of the brokerage industry.
It seems to me that any rule should be fair to existing participants, provide full disclosure to consumers, and ensure adequate protection for consumers. The proposed rule does none of things.
Fairness. To allow a broker who offers a wrap fee account, similar to what a fee-only advisor does, to operate under a different and less stringent set of rules, places the Investment Advisor at a distinct competitive disadvantage from the perspective of liability and the cost of insurance. The issue of discretion is a red herring. Even if the account is non-discretionary, a person providing investment advice should be subject to the same rules as a fee-only investment advisor who also may handle non-discretionary accounts. If the broker does not want to be subject to these rules, they should not be called an advisor. The rules should be the same for everyone who is providing advice so that there is a level playing field for all participants.
Disclosure. The proposed rule appears to limit the amount of disclosure from brokers providing wrap fee accounts by letting them use the normal broker disclosure even though they actually are providing advice. If the broker is going to provide advise, they should provide the same disclosures to consumers as is required of an investment advisor. The consumer needs more disclosure by all in the industry, not less.
Consumer Protection. The proposed rule appears to reduce consumer protection, and therefore, it should be withdrawn. The alternative is to make the situation more confusing for consumers. Consumers should have the same protections and amount of disclosure no matter with whom they are dealing. Anyone providing financial advice for compensation, whether by commission, wrap fee, fee-based or fee only, should be required to disclose his or her sources of compensation and potential conflicts of interest. The consumer is best protected if everyone who markets themselves as a financial advisor, investment advisor, or financial planner provides the same disclosures, even if the advice is incidental to selling stocks. If the broker does not want the fiduciary responsibility and liability, they should not be allowed to hold themselves out as an advisor.