SEC moves to clarify the intentions of advisers versus brokers
Forty-eight percent of consumers say they do not trust financial advisers.
That figure comes from a 2005 report by the Securities and Exchange Commission, which revealed that consumers feel mislead and confused when it comes to navigating the financial forest of brokers, advisers and investors. The SEC wants to remedy this condition, and to this end has mounted a campaign to better define these three groups. Since last year, the commission has required brokers who act as advisers to publish a disclaimer which states, among other things, "Our interests may not always be the same as yours…."
Rob Pool of Arcadia Investment Advisors will not comply with the SEC requirement – because he doesn’t have to. The requirement only applies to advisers who work on commission, and so tend to run a hard sell when it comes to their clients. Rob Pool and few others in Clark County operate on a fee-only basis. "Fee-only" means compensation is based either on an hourly rate, a percent of assets managed, a flat fee or a retainer – the key is that the client pays the bills. Out of 400,000 financial advisers nationwide, less than ten percent do business in this way. And of the 30,000 that operate on a fee-only basis, the average account value is $510,000.
Pool gets paid through a percentage – generally three quarters to 1 percent – of the client’s account. The incentive to the adviser, rather than to sell products, is to grow the client’s money, which in turn grows his or her percentage. Fee-only advisers may not have to display the SEC disclaimer, but they are held to a fiduciary duty to put their clients’ interests ahead of their own.
"It takes away the conflict of interest when you don’t have to rely on sales to make your money," said Pool. "People are tired of getting the sales push. They’re tired of brokers selling them things that they don’t need."
A fortune reversal
A fortune reversal
In a study conducted by The Spectrem Group, a financial consulting firm, in 2004 about 45 percent of wealthy households used a registered independent financial adviser, while 30 percent went with a traditional broker. The study shows that number virtually reversed just two years earlier. This apparent trend toward the independent advisor may serve to help the fee-only component of the industry. Still, the fee-only approach requires a heavy dose of trust from the client, as such advisers essentially are retained and then turned loose to do as they see fit with the money. The question of trust, says John Cameron of Harvest Capital Advisors, may be settled through the SEC ruling, but he feels it doesn’t go far enough.
"It’s more than just a simple disclaimer, it should be about the difference between a fiduciary and a salesperson. Anyone can call themselves a financial adviser and then hang out a shingle," Cameron said, "Still I think (the SEC ruling) is going to provide greater credibility and also show the true nature of the other side of the industry."
Together Cameron and his colleague John Calligari manage $50 million with 47 clients. In Pool’s case, he and his business partner Dick Teutsch, through word-of-mouth advertising, have earned the trust of 250 clients, managing $135 million exclusively in no-load mutual funds. Pool believes the SEC ruling will help business, but allows that other entities such as large banks can bring up the big guns when it comes to advertising.
"Even though it’s becoming popular and we have the momentum coming our way, still there are billions of dollars spent every year on sales people and forecasting to package and sell to the consumer the idea that we’re more knowledgeable than everybody else and we’re going to tell you how to invest your money."
Banks offer ‘bricks and mortar’ advantage
Banks offer ‘bricks and mortar’ advantage
Pool said banks have an advantage in that they offer a "bricks and mortar" facet to the service, generating confidence among consumers through well-established histories. Still, the banks have taken notice, and have made sure to cover the bases when it comes to defining services. First Independent Financial, for example, handles $85 million in combined broker and advice assets. The bank employs people in a broker-adviser capacity; they make sure to announce their intentions as they assume each role. This means that when acting as a broker, out comes the disclaimer, and when they shift to adviser, out comes the fiduciary obligation.
"I think consumers are starting to get a little more educated as to what is out there," said First Independent Financial Vice President and Manager Jennifer Rhoads. "But I think there’s still a lot if confusion out there as to who are the brokers, and I think consumers really have to do some research to find out if a broker is a fiduciary. But as far as the brokerage firms that are holding themselves out as investment advisers, that’s what (the SEC) legislation is all about."
Rhoads said some brokers were not happy with the new legislation.
"I think it’s kind of a scary thing for people that have been in the industry for say, 30, years," she said.
Officials at Merrill Lynch declined to comment on the issue.
Others, like National Association of Professional Investment Advisors Chief Executive Officer Ellen Turf, couldn’t be happier.
"We’re delighted that the discussion is out there and that consumers are getting it and understanding what is available to them," she said. "I think everybody wants to get on the fee-only bandwagon."
Knowing is half the battle
The Coalition for Investor Education is a group of state securities regulators, consumer advocates and representatives of the financial services community. The organization has worked to better define the types of players in this industry, and has published a newsletter to this end, called, "Cutting Through the Confusion."
The paper describes the legal terms broker and broker/dealer as people who are in the business of buying and selling securities. Brokers and brokerdealers are not fiduciaries, and are subject to SEC regulations. A broker’s only obligation with regard to the client is to provide options that suit the individual. Brokers make their money on commissioned sales.
A financial planner is a person who helps to plan estates, tax structures and other strategies. It is not a legally-defined position in the industry. Financial planners are not separately regulated, but planners who trade securities must be registered or licensed as investment advisers and in this case are subject to fiduciary duty. Investment advisers are subject to fiduciary duty, and so must put the clients’ interests ahead of their own. Investment advisers must also hold licenses and provide disclosure on their qualifications, what services they provide, how they are compensated and any possible conflicts of interest. They are regulated by the SEC based on the size of their managed assets. Investment advisers make their money from a fee or a retainer, which is generally a percentage of the account size.
Independent reps vs. Fee-only financial advisers
More than 5,000 independent broker/dealers
82,306 independent reps
$142,000 average account size
15 percent fees
Heavily utilize individual mutual fund companies
Fee-only financial advisers
30,024 fee-only financial advisers
19,500 financial advisers own firms
$510,000 average account size
85 percent fees
Spread assets out widely