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Broker or Advisor—Who Knows the Difference?

It may come as no surprise to many brokers, but more than half of American investors look to them for more than just transactional assistance, according to new research.

It may come as no surprise to many brokers, but more than half of American investors look to them for more than just transactional assistance, according to new research.

The survey, conducted by Opinion Research Corp., a Princeton, N.J.-based research firm, sought to discover if investors understood the differences between brokers and registered investment advisors (RIAs). The organizations sponsoring the research—Zero Alpha Group and the Consumer Federation of America—said the survey findings prove they, in fact, do not.

“Clearly, the SEC has overestimated investor knowledge about brokers and advisors,” said Brent Brodeski, a managing director of Savant Capital Management in Rockford, Ill.

The survey was inspired by the SEC’s “broker-dealer exemption” rule (also known as the Merrill Lynch rule), which was conceived in 1999 and allowed to exist under a “no action” clause without final approval from the SEC since then. (The SEC has pledged to vote on the rule before the end of the year.) The rule allows brokers to charge fees for their services as long as the advice they dispense is incidental to the brokerage services, the advice is nondiscretionary and the broker discloses that the accounts are brokerage accounts.

Provided these conditions are met, the broker will be exempt from being regulated as a fiduciary under the Investment Advisers Act of 1940.

The RIA community, as well as powerful groups like the CFA and AARP, say brokers have been abusing this protection with misleading advertisements and marketing about their services. They highlight the persistent usage of words like “advice” and “financial planning” and “retirement planning” in advertising literature and on the Web sites of broker/dealers as proof that brokers are taking advantage of the public’s lack of knowledge.

The findings of the research, say its supporters, show the tactics have worked, to the detriment of the investing public. According to the survey, only 26 percent of investors understand that the primary role of stockbrokers is to buy and sell investment products. Additionally, more than half (53 percent) believe that investment advice is a key service offered by stockbrokers.

Barbara Roper, director of investor protection at the CFA, says the disclosure requirement does not address the true problem.

“What good can it possibly do to tell investors that an account is a brokerage account if most investors mistakenly believe that brokers are advisors?” she says.

One UBS broker acknowledged that many brokers play up their planning skills to get a leg up, and he believes that most brokers will end up expanding their training to meet the demand for such services.

“I think we’ll all end up being registered investment advisors one way or another,” he said.

The research also found that:

  • 91 percent of investors believe that the same investor-protection rules should apply to both stockbrokers and financial planners when they offer the same kind of investment advice services.
  • 65 percent of respondents said they’d be less likely to us a stockbroker providing investment advice if that individual was subject to weaker investor-protection rules than a financial planner providing the same services.
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