New SEC videos aim to help investors identify brokers vs. investment advisers

Videos criticized for glossing over details of business models, conflicts

Aug 15, 2019 @ 2:34 pm

By Mark Schoeff Jr.

Investors trying to decide whether to hire a broker or an investment adviser can now turn to the Securities and Exchange Commission's website, where the agency posted videos on Thursday designed to highlight the differences between them.

The five videos, which total approximately 14 minutes and are hosted by SEC Chairman Jay Clayton, walk viewers through the services and costs associated with each business model.

In the videos, Mr. Clayton breaks it down this way: Brokers make recommendations on investment-product transactions, while advisers can provide the same guidance but also manage investment accounts on an ongoing basis. He also briefly mentions that many financial professionals are both brokers and advisers.

"We at the SEC want you to be armed with the information to ask the right questions and make the choices that are best for you — whether that means going with an investment adviser, a broker or a combination of the two," Mr. Clayton said.

The videos, which were produced in-house at the agency, are part of the SEC's investor education campaign it launched after approving earlier this year a regulatory package designed to raise investment advice standards.

In the video, Mr. Clayton says the new rules "prohibit brokers and investment advisers from putting their interests ahead of your interests."

The videos received a mixed immediate reaction.

Dennis Nolte, financial adviser, Seacoast Bank, said they "get people thinking about" whether to hire a broker or adviser.

"It's a good start," Mr. Nolte said. "It seemed very earnest and well-meaning. There are some nuances that aren't addressed and some confusing verbiage."

Barbara Roper, director of investor protection at the Consumer Federation of America, said the videos use language that testing has shown confuses investors.

"Good concept, deeply flawed execution," Ms. Roper said. "I'm not sure some of the content is even accurate let alone presented in a way that assists an investor in making an informed choice."

[Recommended video: What's the No. 1 challenge advisers face over the next five years?]

Mr. Clayton tells viewers that brokers are paid by commissions on transactions while advisers are paid a fee based on the size of the account. But that doesn't go far enough, said Knut Rostad, president of the Institute for the Fiduciary Standard.

"The comparison between [brokers' and advisers'] compensation overlooks the structural differences that adviser clients are in advice relationships of two with an investment adviser [who has] a fiduciary duty, while broker customers are in transaction relationships of three [that includes] the BD and issuer," Mr. Rostad wrote in an email.

While commissions based on product sales are often highlighted as a broker conflict, Mr. Nolte gave Mr. Clayton credit for pointing out that advisers also can be biased toward specific investments.

(More: Dually registered advisers found to have conflicts and higher fees)

"He did say there could be a product conflict for advisers even though they're not making commissions," Mr. Nolte said.

But Ms. Roper criticized Mr. Clayton for drawing a parallel between brokers and advisers on third-party revenue.

"That is the broker-dealer payment model," she said. "It's the exception on the [adviser] side."

If investors are in doubt, Mr. Clayton advised them to pose his favorite question to a financial professional they're about to hire: "How much of my money is going to fees and costs and how much is going to work for me?"


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