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- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
The Consumer Federation of America (CFA), a consumer advocacy organization, and Zero Alpha Group (ZAG), a group of fee-only investment advisors, revealed in a conference call today that individual investors remain very unclear about whether the financial professionals they deal with for investments and financial advice act in the client's or the firm's best interests.
This goes to the very heart of an issue that concerns brokerage firms, investment advisors, and the SEC--which was rebuked by the Court of Appeals in Washington, D.C. when it overturned on March 30 the SEC's broker/dealer exemption rule, which exempted brokers from regulation as an investment advisor even when they were being paid fees for investment advice. The issue: whether or not investment professionals that deal with the public need to use a fiduciary standard of care, putting their customers' interests ahead of their own--or their firms. At stake: $300 billion in fee-based accounts at broker/dealers.
The survey was conducted April 12-16, with 1,073 individuals who "described themselves as investors," according to Graham Hueber, senior research associate, Opinion Research Corporation, the firm that conducted the "Investor Knowledge of Stockbrokers and Financial Planners" study for ZAG/CFA. The survey was a follow up to two similar surveys ZAG/CFA conducted in 2004 when the broker/dealer rule was announced.
The 2007 survey showed that more than half the investors polled--54%--looked "to stockbrokers for more than transactional assistance," and 29% said that "financial advice is the 'primary' service" that stockbrokers offer. Ninety-two percent thought that, for the same type of services, financial planners and stockbrokers should be covered by the "same investor protection rules." More than half would be less likely to use a "stockbroker providing investment advice" if operating under "weaker investor protection rules than a financial planner," according to the report.
Barbara Roper, director of investor protection for the Consumer Federation of America, criticized the way the SEC handles individual investor protection. Roper says that every time the SEC has had a chance to "adopt a pro-investor stance, such as when brokers started calling themselves financial consultants," they have sided with the brokers and not the investors. She expects that the SEC will appeal the March 30 overturn of the broker/dealer exemption rule, also known as the Merrill Lynch rule.
Roper argues that the 2004 and 2007 surveys show that most individual investors do not understand the difference between investment advisors and stockbrokers, an echo of the SEC's focus group findings that prompted an ongoing Rand study of investor attitudes. Individuals do little or no research on their own about investments, Roper argues, and "rely virtually without question on the recommendation they receive from that investment professional, and that makes it absolutely essential that those investors know who they're dealing with," as well as about any conflicts of interest, and in whose interests those financial professionals operate. She goes on to say that surveys indicate "that our regulatory policies in this area have been an abysmal failure."
Several members of ZAG participated on the call: Steve Lugar, managing director, BHCO Capital Management, in Dallas, Texas; Gregory Carlson, founding principal, Carlson Capital Management (CCM), in Northfield and Hastings, Minnesota; and Scott Sarber, vice president, Petersen Hastings Investment Management (PHIM), in Kennewick, Washington.
To see the results of the "Investor Knowledge of Stockbrokers and Financial Planners" study, please go here.