Pennsylvania + Wall


Pennsylvania + Wall provides commentary on a broad range of current financial, economic and regulatory reform topics. The views expressed are those of the authors, and do not necessarily reflect the position of SIFMA.

October 22, 2014

There’s No ‘One Size Fits All’ Financial Advisor

By Kenneth E. Bentsen, Jr.

Fiduciary duty - handshakeI am writing in response to the New York Times article, entitled "Before the Advice, Check Out the Adviser," which ran in the Sunday, October 12, 2014 print edition.

The article operates under the premise that when it comes to choosing an investment professional, only a registered investment advisor (RIA), or fiduciary, can be trusted to provide sound, cost-effective service, and that any non-fiduciary professional or broker-dealer is simply subpar. The facts fail to bear this out.

Retail investors may, and do, choose among different models that provide investment services, including brokerage, money management and advice.  It doesn't mean that one is better than another. And each of these models is subject to a distinct set of rules and regulatory oversight. In fact, the rules and system for redress governing brokers is in many ways more stringent than the one that governs registered investment advisers, notwithstanding their fiduciary duty. 

Having said that, SIFMA has long called for a uniform fiduciary standard of conduct for both registered investment advisers and broker-dealers, when they provide the same type of service. However, it would be misguided to place all investment services and their delivery models in one bucket.

Brokers operate under a "suitability" standard while registered investment advisors operate under a "fiduciary" standard.  These standards apply based upon the distinct services provided -commission-based brokerage vs. fee-based money management, respectively.  The empirical evidence is quite clear that commission-based accounts are far more cost efficient than a fee-based advisory account. 

For the investor who chooses to either "buy and hold" or make their own investment decisions, a commission-based brokerage account is far more cost efficient.  And, the SEC has recently begun to question the prudence of registered investment advisers placing such investors in fee-based managed accounts because, in effect, the buy and hold investor is paying higher fees for services not utilized. 

Finally, and the story bears this out, commission-based brokerage clients have proven recourse through the regulatory structure that provides for significantly more oversight and redress.  Brokers are examined by the SEC and FINRA, the self regulatory organization Congress created to regulate brokers on behalf of and subject to oversight by the SEC, at least once every other year.  Registered investment advisers, on the other hand, are regulated only by the SEC and states, and subject to examination once every eleven years. 

Perhaps most important, investors may seek redress through arbitration with their broker, an efficient and low cost adjudication  process that has shown to favor investors.  A client of a registered investment adviser who believes they have been unjustly harmed may only seek redress through state courts. 

Many brokers are also registered as investment advisers.  This is because clients may want to choose a managed account in some cases, and a commission account in others.  There is a difference in types of services because customers demand choice.  There is an undeniable difference in cost.  And there is a difference in the regulatory framework, and how the duty to the customer, as per the service provided, is enforced.  And in fact, evidence would strongly suggest that investors receive equal if not greater protection under the brokerage model. 

Kenneth E. Bentsen, Jr.
President and CEO



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