February 14, 2005

Broker vs. Advisor

For awhile there has been a debate within the brokerage industry on whether or not their salespeople are brokers or advisors. This primarily stems from the shift from a commission- based business to a fee-based business.

Back in the day when I was a broker for A.G. Edwards I remember our new hire group met with Ben Edwards, the 4th or 5th generation leader of the company. He was not a big fan of the shift to fee-based arraignments with clients. Perhaps he saw the conflict that is upon their industry.

By taking fees for management of assets the brokers are moving towards an advisory position with a client. Now most people always thought their broker was their advisor. Technically, no. To be an advisor, you would have to have fiduciary responsibility for their clients and subject to the 1940 Investment Advisor Act. Brokers do not fall under this Act and they are not fiduciaries; they are salespeople and their first responsibility is to their company (broker-dealer). Advisors are fiduciaries and their first responsibility is towards their clients.

They do fall under quite a bit of regulations, namely the Securities and Exchange Act of 1933. Most importantly they have to know their customer. They are subject to fines and penalties if they do not sell products that are suitable to their customers.

Things may change very shortly as the SEC will rule if brokers can be viewed as advisors and not be held with the fiduciary responsibility. This is the so-called Merrill Lynch Rule. I am definitely interested in how they decide. Most brokers do look out for the best interest of their clients, but there are times when a conflict of interest arises. I personally know of one person who was fired because he would not sell annuities since he knew that they were not beneficial to his clients. This is one of the reasons why I am an advisor, I do not want to have that conflict of interest.


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