Robert Barker’s column in the August 21st issue of Business Week asks the question "When are brokers more than brokers?" This column gets to the heart of an issue that has been a source of controversy and debate in the financial industry. In a nutshell, stockbrokers at many firms are now calling themselves either "financial advisers" or "financial consultants," yet the Securities and Exchange Commission (SEC) is not holding them to the higher standard required of investment advisers. A proposed SEC rule (dubbed the "Merrill Lynch Rule," since major brokerage firms have lobbied for it), is expected to be adopted this year called "Certain Broker-Dealers Deemed Not To Be Investment Advisers."
There are two major differences between advisers and brokers. First, investment advisers owe their clients a fiduciary duty to always put the clients’ interests first. Contrast this with securities law that assumes brokers aren’t really in the business of giving advice, so that any guidance they give (such as recommending a particular stock or mutual fund) is incidental (given without extra payment) to their role as a broker. Second, advisers are required to disclose their background, business practices, and make a complete disclosure of how they are compensated, including any potential conflicts of interest. This is found in Form ADV, which any investment adviser is required to provide to clients prior to the client entering into any sort of agreement.
The stockbrokerage firms want the best of both worlds, to wear the "financial adviser" hat without the fiduciary duty or the disclosure. Quoting Robert Barker "Somewhere between Washington and Wall Street, truth lies bleeding. If you prefer to bypass discount firms and pay extra for a full-service broker, compare the cost of a brokerage account with an advisory account. Ask to see what the SEC calls Form ADV. It will detail how the adviser makes money and disclose any potential conflicts of interest. The truth is, a broker without an ADV is just a broker - by any name."
Look beyond the title of "financial adviser," "financial consultant," or "financial planner" and request written disclosure, which Form ADV provides. These titles create an aura of professionalism, which many are anxious to claim, whether they are necessarily accurate or not.
Certified Financial Planner® (CFP®) practitioners have taken the additional steps needed to earn the title of "financial planner" or "financial advisor." For example, this author is a CFP, and went through the certification process. According to Roy Diliberto, president of the Financial Planning Association, "Right now, only one out of every twelve who enters the program becomes a CFP." Over approximately a two-year period I took five courses through the College for Financial Planning.
The five courses were:Only after passing an exam in each of these categories was I able to sit for the two day Board exam.
There is also a minimum experience requirement for CFPs of at least three years in counseling clients on financial matters. CFPs also agree to abide by a strict Code of Ethics, and have ongoing continuing education requirements.
For more information on CFP practioners, visit the CFP Board of Standards website at www.cfp-board.org, and go to the Consumer section.
Website of the month - www.investinginbonds.com
Bonds and how they work are often an area of confusion for many investors. This website belongs to the Bond Market Association, and they do an excellent job of providing educational information about investing in bonds. This information ranges from the all the different kinds of bonds there are, to how bond prices and interest rates work together. The website’s clean and uncluttered format is easy to navigate.
"Work like you don’t need the money. Love like you’ve never been hurt. Dance like nobody is watching." Mark Twain
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