Investors are having a lot of trouble telling the difference between stockbrokers and investment advisors.
Despite the very real differences in their responsibilities toward clients, the lines between professional advisors who manage investment accounts for a fee and stockbrokers have become blurred, especially since major stock brokerages began offering look-alike fee-based accounts.
The Securities and Exchange Commission is concerned that investors are confused and soon will propose specific disclosures that brokers will have to make.
The major difference between investment advisors and brokers is their responsibility to the clients.
Advisors are required to act as fiduciaries, meaning they have to put their client's interests first. This is considered a strong protection for investors, since the fiduciary has a legal duty to the client.
Brokers, on the other hand, are not bound by those rules. Their main obligation is to offer investments that are suitable to an individual client's needs.
Since it isn't always clear what is suitable, this protection is weaker. In fact, some arbitrators have ruled that brokers weren't obligated to represent a customer's best interest.
Meanwhile, brokerage firm ads stress their new roles as "advisors" and long-term investment planners.
The SEC's own focus groups show that consumers can't tell the difference.
When asked to distinguish among brokers, investment advisors, and financial planners, investors in Baltimore and Memphis offered responses like these:
- "I don't know the difference. I mean I've got a guy that gives me advice. I don't know what he is."
- "I couldn't tell you (what the differences are). "It's probably on my monthly sheet and I couldn't tell you which one it is."
- "How could you be clear when you've got brokerages calling themselves planners and planners calling themselves investment advisors? It's not clear."
The SEC is expected to tell brokers that they must offer plain-English disclosures in their advertisements and brochures.
The brokers will be required to tell investors that brokerage firm interests may not be the same as the investor's interests.
Investors will be urged to "ask questions to make sure you understand your rights and our obligations."
Source: Wealth Advisor, published quarterly by Pinnacle investment Management Inc., 573 Hopmeadow St., Simsbury, CT 06070. www.Pinnacle-Investment.com.
