As more baby boomers approach retirement age, the demand for high-quality financial advice has been on the rise. To meet this demand for competent advice, brokerage firms began touting themselves through advertisements and other marketing mediums as “full service” firms capable of providing sound financial advice on a wide array of issues from retirement planning to tax advice. In recent years, it also seemed like every day a new credential popped up next to the names of these so-called “financial professionals.”
This marketing campaign has served to confuse investors. Experts in the industry have long believed that ordinary investors have no idea that there are different types of financial advisers and, more importantly, that each may owe different legal duties to their clients. Because of the anticipated confusion among consumers, the SEC requested that RAND Corporation conduct a study to examine the public’s understanding between the two main types of financial professionals, brokers and investment advisers.
In a nutshell, according to the RAND study, a broker is defined as someone who conducts transactions in securities on behalf of others, while an investment adviser is someone who provides advice to others regarding investments. According to the RAND study, consumers discern absolutely no difference between the two, believing that both types of financial professionals are acting in their best interest.
The study’s results support the arguments that Page Perry attorneys have made for years in arbitration proceedings filed on behalf of investors. The relationship that exists between a customer and a broker is fiduciary in nature and because of that relationship, brokers owe the highest duty to their customers. It is unfortunate that brokerage firms continue to attempt to minimize the trust relationships that exist with their clients and fiduciary duties owed by its brokers when problems arise. This type of “Heads I Win, Tails You Lose” approach is part of the problem with the financial services industry today. As the RAND study indicates, most investors are looking for a competent financial adviser to trust. Therefore, from a legal duty perspective, there should not be any difference between an investment adviser and broker.
It is true that investment advisers and brokers are regulated by two different sets of rules and may owe different legal duties to their clients. Registered investment advisers, on the one hand, are regulated under the Investment Advisers Act of 1940 and are defined as statutory “fiduciaries.” A fiduciary is someone who must act in the best interest of his or her client and avoid self-dealing. A fiduciary is similar to what most people refer to as a trustee. Financial advice given by an investment adviser must be conflict-free or, if a conflict of interest exists, it must be fully disclosed to the client.
Brokers, on the other hand, are governed by the Securities Exchange Act of 1934 and are not statutory fiduciaries like investment advisers. In the context of customers and brokers, the scope of the legal duty is defined by the nature of the customer-broker relationship. A fiduciary duty often arises if the broker exercises control over the decisions of the client and for many other reasons.
Should an investor sue an investment adviser for giving bad financial advice, the investment adviser’s statutory fiduciary duties to the customer cannot be disputed. On the other hand, when an investor sues a broker or brokerage firm for bad advice, the broker and his firm will likely deny the existence of a fiduciary relationship and attempt to hold the investor (who most likely relied primarily upon the advice of his or her “financial advisor”) solely responsible for the investment decisions made.
The RAND study confirmed that investors have difficulty distinguishing among industry professionals and perceiving the web of relationships among service providers. Furthermore, the “we do it all” type of advertising disseminated by brokerage firms only makes matters worse. Even more troubling, according to the study, about 2/3 of all survey participants were classified as “experienced” investors (defined as having investments outside of retirement accounts, formal training in finance or investing, or holding investments only in retirement accounts but answering positively to questions gauging their financial understanding). The study also found that 73 percent of consumers seek professional assistance for advising, management or planning, and 75 percent seek professional assistance for conducting stock market or mutual fund transactions. Focus groups in the study also found that the generic titles commonly used by brokers, such as advisor, financial advisor, or financial consultant are interpreted as being more similar to investment advisers than to brokers in terms of services and duties.