Investors Want Same Rules for Advisors, Brokers

Survey: Investors Want Same Rules For Advisors, Brokers

November 22, 2004

WASHINGTON (Dow Jones) – Investors don’t understand the difference between brokers and financial advisors and are very concerned that both can offer financial advice without being subject to the same rules, according to a new survey to be issued Monday by a leading discount brokerage firm.

A whopping 90% of the investors surveyed want Congress to step in and set uniform standards of protection for stockbrokers and investment advisors who provide fee-based financial advice, said TD Waterhouse Group, Inc., a subsidiary of Toronto-Dominion Bank (TD), which sponsored the poll.

Confusion abounds when it comes to current laws: The survey found a majority of investors mistakenly believe brokers are legally obligated to act in the investor’s best interest, and only 25% know that investment advisors have such an obligation. It found similar confusion about other rules required of investment advisors, but not brokers, such as the duty to inform customers of any conflicts of interest before providing investment advice.

Fully 84% of those questioned said financial advisors and brokers that offer fee-based financial advice should come under the same industry regulation, according to TD Waterhouse. Almost as many said they are concerned about the differences and agreed they would be more likely to choose an investment advisor over a broker if they knew they would receive more protections by doing so.

Release of the findings comes as the issue returns to the front burner at the SEC. In 1999, the agency proposed allowing brokers to offer discretionary, fee-based advisory accounts without coming under the stricter rules governing investment advisors. The SEC never approved the proposal, dubbed “the Merrill Lynch rule,” but promised not to sue brokers who act as if it were in effect.

Financial planners complained the SEC’s approach was a boon to Merrill Lynch & Co. (MER) and other brokerage firms, allowing them to market advisory services while avoiding stricter advisory rules. Earlier this year, the Financial Planning Association sued the SEC, saying its implicit approval of the 1999 rule without a formal vote violates federal administrative procedures. The lawsuit prompted the SEC to reopen the matter for comment, and it has promised to resolve the matter shortly.

TD Waterhouse said the fight should be decided in favor of investors, not planners or brokers. It suggests the SEC scrap distinctions between brokers and financial advisors, ensuring that investors get equal protection when they get professional financial advice.

“We recommend a common industry standard that provides investors uniform protection,” TD Waterhouse USA President and Chief Executive Timothy Pinnington said in a statement announcing the survey results.

Distinctions between brokers and advisors have blurred over the years, making separate rules a mistake, Pinnington wrote in a Sept. 22 comment letter to the SEC. He said anyone offering fee-based investment advice should be subject to the same disclosure and sale practice rules, and be required to provide the best execution of customer trades while eliminating bans on principal trading now in place for investment advisors. Since distinctions between brokers and advisors are contained in existing laws, TD Waterhouse said the SEC likely would need Congress to rework and update those laws.

The survey, conducted in October, covered 1,000 investors who hold stocks, bonds or mutual funds outside an employer-sponsored retirement plan, such as a 401(k), and has a margin of error of plus or minus three percentage points, TD Waterhouse said.

By Judith Burns, Dow Jones Newswires, 202-862-6692