The January 28 edition of the Wall Street Journal featured an article "Wait, Let Me Call My ChFC - Your Stockbroker or Advisor Can Have Many Baffling Names; A New SEC Rule Might Help" by Jeff D. Opdyke (subscription required). The article discusses a new SEC Rule on disclosure practices of advisors and provides some very good guidance on the different roles and responsibilities of the various types of financial professionals and their customer service philosophies.
The following excerpt summarizes the new SEC Rule:
In a small but important step to address concerns like these, starting Tuesday, the Securities and Exchange Commission is kicking off a new rule designed to make it easier for consumers to know what they're getting when they hire a financial professional.
The new rule mandates that stockbrokers who hold themselves out as financial planners must be clear about the role they're playing when dealing with clients. In other words, if they're clearly providing advisory services, then they're duty-bound to act in a customer's best interest, as are traditional financial planners. If they're acting as a broker -- in other words, essentially, a salesperson -- then they must be clear that's the role they're playing.
In addition, the article distinguishes between the two primary types of financial adviory professionals and the regulatory frameworks.
Generally, only two types of titles are scrutinized by regulators, and therefore offer consumers legal protections: broker-dealers and registered investment advisers. Broker-dealers (think: stockbroker) serve primarily as stock-market order-takers, facilitating trades on Wall Street and in the bond market. They report to the NASD, the brokerage industry's self-regulatory arm. Registered investment advisers (think: financial planners), which report to the SEC, primarily provide services such as building a financial plan or offering tax- and estate-planning advice.
Broker-dealers and advisers are held to different standards when dealing with clients. Brokers must abide by so-called suitability rules requiring they "know the customer" and offer investments suitable to a client's needs.
The concept of "suitability" can be murky, however, and brokers aren't obligated to act solely in your best interest. The NASD has been strengthening suitability rules in recent years. Still the organization last year fined the industry a record $125.4 million for transgressions including inappropriate sales of annuities and mutual funds.
By contrast, registered investment advisers are subject to a so-called fiduciary duty, a legal standard mandating they act solely in your best interest. Advisers also are subject to disclosure rules requiring they provide to clients Form ADV listing potential conflicts of interest, compensation practices and disciplinary proceedings.
Hopfully, the new SEC Rules and increased customer awareness from articles like this will serve to highlight for investors the unique customer service benefits of registered investment advisors.
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