The Securities and Exchange Commission in 1999 exempted stockbrokers that charge fees for their services from the stricter rules that govern financial planners. The SEC did this on the theory that any advice brokers give is “solely incidental to the brokerage services provided.” But it never drew up formal rules spelling out precisely where “solely incidental” ended and real advising began.
The financial planning industry has been up in arms about this ever since because many big Wall Street brokers now are charging set fees to manage customer assets rather than fees for each transaction. Wall Street firms are marketing themselves as caring financial advisers concerned only with looking out for their customers. This means Wall Street has been horning in on what had been the traditional turf of financial advisers. It’s unfair, the financial advisers argue, to allow the stockbrokers to do that when the rules governing brokers are different than those governing advisers.
Last summer the Financial Planning Association sued, then agreed to put that suit on hold as long as the SEC acted reasonably quickly to clarify where the lines were. The SEC exemption is set to expire on April 15.
This turf battle between two mammoth financial services industries has some potential impact on the average investor. What the SEC does will determine whether the professionals managing your investment and retirement accounts must by law put your interests first.
Financial advisers must look out for the best interests of their customers, as prescribed in the Investment Advisers Act of 1940. They must also fully disclose to clients their qualifications, disciplinary history and conflicts of interest.
Brokers aren’t subject to that law. They are regulated in other ways. They bear responsibility for executing customer trades, and those trades must be deemed suitable for the customer. But that’s it. Acting in the best interests of the client and fully disclosing potential conflicts of interest haven’t been part of the creed. The SEC exempted them because the advice they give is considered to be “solely incidental to the brokerage services provided.” But how “incidental” is that advice when brokers are promising their customers a comfortable retirement?
Under current regulations, the distinction that separates brokers from financial advisers who must meet the higher standards of the Investment Advisers Act is whether they are paid commissions to execute trades or flat fees to manage the account. The exemption has allowed brokers to offer fee-based accounts while not having to meet those higher standards.
But how brokers or planners are paid–to trade or to manage the account–is an outmoded distinction. Brokers increasingly are migrating to asset-management fees from transaction fees because that’s what customers prefer–often in the mistaken belief that their interests will more likely be put first. What matters to investors today is what those professionals do, not how they’re compensated. If they are selling themselves as financial advisers, with all the fiduciary responsibility that entails, then they should meet the investment act standards.
Customers shouldn’t have to find out the hard way–in binding arbitration with their broker when the account has tanked–that all those gauzy promises about taking care of them and planning their retirement future were just so many words to get them in the door.
The brokers argue they are already in one of the most heavily regulated industries in the country, and that this additional regulation would limit competition and restrict investors’ choices. Sorry, we’re not buying. The financial planning industry insists that if brokers are going to market themselves to the public as financial advisers, they ought to have to meet the same standards. That makes sense.
The SEC is charged with protecting investors. Allowing this double standard doesn’t accomplish that. This ill-conceived exemption is set to go away, and the SEC should allow that to happen.
