The Power of the Informed Investor

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you under-stand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salesperson’s compensation, may vary by product and over time.”

The referenced disclosure was part of a rule proposed by the Securities and Exchange Commission (“SEC”) in an attempt to resolve a dispute with the Financial Planning Association over the SEC’s refusal to require stockbrokers providing investment advice for a fee to register as investment advisers under the Investment Advisers Act of 1940. The Financial Planning Association eventually sued the SEC and won the case.

The court struck the proposed rule down, effectively removing the requirement for the disclosure. Lost was a meaningful disclosure that alerted investors to the inherent conflict of interests problem regarding stockbrokers, their ability to legally put their own financial interests, e.g., commissions, ahead of their customers’ best interests. The SEC could have revived the required disclosure in order to help protect investors, in accordance with their stated mission, but they did not do so.

The SEC subsequently commissioned a study by the Rand Corporation that included a study of investors’ understanding of the difference of the legal duties that stockbrokers and investment advisers owe to the public. The study found that a majority of investors mistakenly believed that stockbrokers owe a fiduciary duty to act in their customers’ best interests. Investment advisers are held to a fiduciary standard, which means that they must always act in their clients’ best interests. Stockbrokers are held to a duty to only recommend “suitable” investments, a nebulous term that allows stockbrokers to recommend products that are “suitable,” yet provide higher commissions for the stockbroker than other equally “suitable” investment options.

A study by TD Ameritrade, another broker-dealer, resulted in similar findings. Some of the interesting findings of the studies:

  • Only 29 percent of those polled understood that the primary responsibility of stockbrokers is to sell investment products.
  • 90 percent of the investors polled believe that a stockbroker and an investment adviser who provide the same services should be held to the same standard in dealing with the public.
  • 97 percent of investors agreed that financial professionals should be held to a fiduciary standard requiring that they always put clients’ interests first , including a requirement that anyone providing investment advice must disclose all fees and conflicts.

Both studies demonstrated both the public’s confusion on the fiduciary duty issue and the need for some sort of disclosure statement advising the public of the conflict of interests issues regarding stockbrokers. And yet, to date,  the SEC does not require stockbrokers to disclose the conflict of interests issue

There is a familiar saying – “knowledge is power.” Nowhere is that truer than with  regard to investing. The more knowledge an investor has, the greater his or her ability to detect investment fraud and avoid unnecessary financial losses. Thus, the byline on our blog, “the power of the informed investor.”

I started this blog in order to provide the public with information that they could use to manage their financial affairs proactively to better protect their financial security. (See and Based on the feedback and emails that I have received, people have found the information on the blog useful and informative.

A recent study found that only 22 percent of the public trust the financial services industry The SEC should take strides toward improving trust in the investment industry by requiring greater transparency on fees and more investor-friendly information that helps investors protect their self-interests.

The SEC needs to act in accordance with its mission statement and enact a regulation that alerts investors to the conflict of interests issue regarding stockbrokers and the potential financial harm that can result to investors as a result of the stockbroker’s ability to put the stockbroker’s financial interests ahead of their customer’s best interests. The studies mentioned herein clearly reflect both the need for such disclosure and the benefits that such transparency would provide in leveling the playing field.

How could someone in good faith argue against the benefits of a disclosure that would inform the public of important information that serves to promote honesty and basic, fundamental fairness, a disclosure that would allow investors to better protect their financial security?

I do not expect the SEC to enact a rule requiring broker-dealers and stockbrokers to disclose their conflict of interests. That is why I have written this post, to make the public aware that stockbrokers can legally put their own financial self-interests ahead of a customer’s best interests. Now help your friends and family and pass the information on.

Happy Holidays!

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