Stockbrokers have Different Allegiances than Advisors

According to a survey conducted from April 12 -16, 2007, the average pre-retiree could not distinguish between a stockbroker and a registered investment advisor in order to determine who they should be listening to for retirement planning. The Consumer Federation of America (CFA), a consumer advocacy organization, and Zero Alpha Group (ZAG), a group of fee-only investment advisers, canvassed 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.

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. Both misapprehensions could spell disappointment for retirees.

Majority Want Protective Laws

Significantly, 92% thought that, for the same type of services, financial planners and stockbrokers should be covered by the “same investor protection rules.” This is where the public is overwhelmingly mistaken. Apparently, if they knew better, 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.

Prudent standards demand that all of your advisers owe their first loyalty to your interests, not their own. The fiduciary standard is what people typically rely on for important issues in medicine, law and finances.

How do you find someone who is dedicated to your goals and objectives?

If they don’t offer advice, what do brokers do? According to the act, a broker is, “Any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank.” The key word is effecting, which means that brokers make the trades happen. They encourage and facilitate the transaction. Today’s brokers sell financial products to customers for a fee.

By Law, Brokers are not Investment Advisors

While advisors must act in their client’s best interest at all times, brokers do not face this requirement. Brokers must understand their client’s financial picture and direct them towards appropriate products. Advisers are sworn to put their clients’ interests ahead of their own, in accordance with the Investment Advisors Act of 1940. The Act defines an advisor as, “Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” The Act specifically precludes brokers from being considered investment advisers.