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Regulation and Compliance > Federal Regulation > SEC

A Groundbreaker

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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 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.”

Diahann Lassus, chair of NAPFA’s Industry Issues Committee, says “the SEC failed to ask the right questions.” While the survey asked “What business practices exist now and what is the consumer understanding of these business practices?” instead, the question should have been “How can existing laws be applied to best ensure a positive financial future for Americans?”

The SEC commissioned the study following the March 2007 Court of Appeals decision that overturned the SEC’s broker/dealer exemption rule.

In addition to the survey, the study included six focus groups with 10 to 12 participants each who discussed the same topics and offered the opportunity for the Rand researchers to probe for the assumptions and reasoning that lay behind participants’ responses.

Two-thirds of respondents were classified as “experienced” investors who “held investments outside of retirement accounts, had formal training in finance or investing, or held investments only with retirement accounts but answered positively to questions gauging their financial understanding.”

Rand presented respondents with a list of services and obligations and asked them to indicate which items applied to investment advisors, brokers, financial advisors or consultants, or financial planners. “Their responses indicate that they view financial advisors and financial consultants as being more similar to investment advisors than to brokers in terms of services and duties. However, regardless of the type of service (advisory or brokerage) received from the individual professional, the most commonly cited titles are generic titles, such as advisor, financial advisor, or financial consultant.”

The focus-group participants shed further light on this confusion when they commented that “the interchangeable titles and ‘We do it all’ advertisements made it difficult to discern broker/dealers from investment advisers. Like survey respondents, focus-group participants indicated that they would be willing to seek services from an investment adviser or a broker, but for different reasons. The compensation structures, disclosure requirements, and legal duties make investment advisers appealing.”


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