By Michelle Singletary
Washington Post Staff Writer
Wednesday, January 26, 2011; 6:49 PM
When the Government Accountability Office and the Securities and Exchange Commission issued reports on the professionals who help investors make financial choices, I couldn't help but think of the battle cry of the civil rights movement.
But when it comes to overseeing financial advisers and broker-dealers, of course, that rallying cry turns to a wail of frustration. The Washington way is to study the problem to death, release reports and make recommendations that then have to be studied all over again. How long? Too long.
The GAO concluded that investors "may be unclear about standards of care that apply to financial professionals, particularly when the same individual or firm offers multiple services that have differing standards." And although there is no need for additional layers of regulation, the GAO said, a "more robust enforcement of existing laws could strengthen oversight efforts."
The GAO's recommendation? More assessments. The government should find out the extent to which investors understand the titles and designations used by financial planners. Additionally, the National Association of Insurance Commissioners, in concert with state insurance regulators, should assess consumers' understanding of the standards of care with regard to the sale of insurance products such as annuities.
The SEC's 208-page staff report concludes that investors are confused about the difference between the regulatory responsibilities of investment advisers and broker-dealers, who are subject to different standards when providing advice about securities. An investment adviser has a fiduciary duty to serve the best interests of clients. A broker-dealer is a firm or individual licensed to sell individual securities. Brokers don't have to act in a client's best interest. Instead, the law says they have to make sure their recommendations are suitable for the client.
Of course, this distinction is perfectly clear to you, right?
At least the SEC staff gets it. So what did it recommend? A uniform fiduciary standard of conduct for broker-dealers and investment advisers.
"Retail customers should not have to parse through legal distinctions to determine whether the advice they receive was provided in accordance with their expectations," the SEC staff wrote. "Instead, retail customers should be protected uniformly when receiving personalized investment advice or recommendations about securities regardless of whether they choose to work with an investment adviser or a broker-dealer."
I thought, "Yeah, here's a change that could make things easier for investors."
But let's not forget the Washington way. At the same time that the SEC staff issued its report, two Republican-appointed commissioners - Kathleen L. Casey and Troy A. Paredes - pooh-poohed the idea of uniformity.
The SEC study, the two commissioners wrote in a joint statement, "does not adequately recognize the risk that its recommendations could adversely impact investors. Indeed, the study does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and, therefore, the study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection." Their recommendation? More research. "A stronger analytical and empirical foundation than provided by the study is required before regulatory steps are taken that would revamp how broker-dealers and investment advisers are regulated."
I'm inclined to listen to the frontline people out there trying to protect investors. The North American Securities Administrators Association agrees with the recommendation of the SEC staff.
"State securities regulators routinely see the financial devastation caused when the interests of investors do not come first," said David Massey, president of the NASAA.
Both the GAO and SEC studies were required under the Wall Street Reform and Consumer Protection Act enacted last year and were mandated because of concern for investors who aren't getting proper advice. Investors are increasingly looking for help in selecting and managing their investments. They seek guidance in choosing insurance products and managing their investments once they retire. But financial planning is a wide-ranging field with an alphabet-soup of designations - from CFP (certified financial planner) to ChFC (chartered financial consultant) to PFS (personal financial specialist). The titles and designations vary greatly in the expertise or training, according to the GAO.
SEC-registered advisers managed more than $38 trillion for more than 14 million clients as of Sept. 30, according to the staff report. The commission and the Financial Industry Regulatory Authority, or FINRA, a self-regulatory organization, oversee about 5,100 broker-dealers. Registered broker-dealers had more than 109 million retail and institutional accounts at the end of 2009.
How much longer will investors have to wait for clear fiduciary standards that apply to all the professionals who are providing much-needed financial advice? I hope not much longer.
Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Her e-mail address is email@example.com . Questions are welcomed, but because of the volume of mail, personal responses may not be possible.