A Groundbreaker

Now that the much-anticipated Rand study of the broker/dealer and investment advisory industries is out, it promises to be the biggest topic of discussion for both industries this year. While its findings confirm what most already knew–that investors indeed have trouble distinguishing between advisors and brokers–the SEC, as the bastion of investor protection, should take it seriously, industry officials say. The study’s authors note that their “analysis confirmed findings from previous studies and from our interviews with stakeholders: Investors had difficulty distinguishing among industry professionals and perceiving the web of relationships among service providers.”

The report (available at sec.gov) is based on a Rand survey of 654 U.S. households that asked how respondents perceived the differences between investment advisors and broker/dealers, their experience with financial services providers, and the level of satisfaction with the services they received. It found that “the industry is very heterogeneous, with firms taking many different forms and offering a multitude of services and products. Partly because of this diversity. . .investors typically fail to distinguish broker/dealers and investment advisers along the lines that federal regulations define. Despite their confusion about titles and duties, investors express high levels of satisfaction with the services they receive from their own financial service providers.”

John Heine, an SEC spokesman, says Chairman Christopher Cox has given SEC staff four months to study the report and provide recommendations to the Commissioners.

Industry officials are already weighing in with their own recommendations. The Financial Planning Association (FPA) has asked the SEC to conduct a roundtable for consumer and industry groups to discuss the report’s findings. Tom Bradley, president of TD Ameritrade Institutional, agrees that a roundtable discussion is a good idea.

Duane Thompson, managing director of the FPA’s Washington, D.C., office, says he anticipates the SEC will seek reforms via rulemaking and recommendations to Congress. “The fact that there is a lot of confusion out there, and there are different standards of conduct and laws” should compel the SEC “to want to harmonize regulation or come up with something to address the weaknesses in current regulation,” Thompson says.

Bradley says the SEC must act because “as far as investors are concerned, the lines are blurred” between who’s an advisor and who’s a broker. Brokers either need “to go back to the more traditional way of doing business” or new regulations must be adopted, he says, because “we’re operating in a totally different environment.”

David Tittsworth, executive director of the Investment Adviser Association in Washington, says the least the SEC can do is update the investor education portion of its Web site to include pertinent information about the differences between brokers and advisors. He’d also like to see the SEC re-propose Part II of Form ADV to “help investors select an investment professional.”