Advisor? Or Salesperson Masquerading as Advisor?

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Broker? Adviser? Difference is important
Jay HancockMay 1, 2005
ONLY 213 YEARS after the New York Stock Exchange's founding, the government has added regulation requiring many brokers to say this before they take your money: "Our interests may not always be the same as yours."
No kidding!
Besides enjoying commissions on stock and bond trades whether or not the trades help your portfolio, brokerages often receive what amount to legal kickbacks from sellers of mutual funds, variable annuities and other products.
A broker might be tempted to sell you a mediocre fund with a big referral fee instead of a great fund with no fee. No, his interest is not the same as yours.
The Wall Street scandal aftermath is littered with fine print that will soon be ignored and unappreciated except perhaps by Georgia-Pacific, whose paper sales surely must have soared. But the red flags hung out a couple weeks ago by the Securities and Exchange Commission - with assistance from Baltimore investors, which we'll get to - are worth remembering, especially because they are still inadequate.
They have to do with the difference between brokers and investment advisers.
Do you know which one your financial agent is? This distinction is fuzzy but critical, because investment advisers are held to different duties and disclosure requirements than brokers.
Under law, advisers must put clients' interests first. Fiduciary duty, the attorneys call it. Brokers are prohibited from selling "unsuitable" investments to clients, but that standard is held by consumer advocates to be less strict and offer lower protection to investors. (The National Association of Securities Dealers disagrees, saying the "suitability" rules are just as rigorous.)
Barbara Roper, director of investor protection for the Consumer Federation of America, puts it bluntly. Brokers, she says, are "salespeople" who may be more interested in moving the product than helping the client.
"People are out there who are salespeople who call themselves advisers, and there are people out there who are advisers who call themselves advisers, and you'd better know who you're dealing with," she says.
That has gotten harder and harder.
"Financial planners" are everywhere. Banks and insurance agents sell mutual funds. Brokers, once basically stock and bond order takers and presumed by regulators to give advice only "incidentally," now dispense counsel on how to reach life financial goals.
Some are advisers. Some are brokers. Some are either, depending on what they're selling.
The new regulation, which requires some brokerage accounts to be treated as "investment adviser" business and others to come with the "our interests may not always be the same" caveat, is supposed to toughen standards for some brokers and require better disclosure from the rest.
It followed focus groups in Baltimore and elsewhere that showed investors were clueless about financial-planner categories.
"I don't know the difference," one Baltimore investor told SEC consultants in February (the agency doesn't identify them). "I mean, I've got a guy that gives me advice. I don't know what he is."
From another: "How could you be clear when you've got brokerages calling themselves planners and planners calling themselves investment [advisers]? It's not clear."
Like other organizations seeking to gauge the consumer pulse, the SEC likes Baltimore as a marketing microcosm.
"It's not New York, and it's not Washington," says Susan Wyderko, director of the agency's Office of Investor Education. "We wanted to affirmatively avoid those two cities because we wanted to find out what real people think."
The real people in Charm City gave the SEC an earful. Among other things they successfully urged the agency to use "plain English," not jargon, in the new disclosures. Don't say "fiduciary," they said.
"Hey, we're lawyers. We think those words are clear," Wyderko joked to me.
Even with the changes, the words aren't clear enough. Disclosure standards and required duties are still weaker for brokerage accounts than for investment-adviser accounts, which require timely revelation of specific financial relationships and other conflicts of interest, Roper says.
The SEC is still working on refinements. Meanwhile, ask your financial agent whether your accounts are brokerage or advisory. If brokerage, ask more questions. Are they being paid to sell you a mutual fund or other product? By whom? How much? Is this really what you need?
Copyright © 2005, The Baltimore Sun