Saturday, January 5, 2008
Earlier this week the SEC posted on its website the pre-publication copy of the RAND Report on "Investor and Industry Perceptions on Investment Advisers and Broker-Dealers." (The SEC states that there will be no substantive changes in the final report, expected to be released in March 2008). Commissioned by the SEC after the D.C. Circuit invalidated the SEC rule that allowed broker-dealers to offer fee-based accounts without registering as investment advisers, the study (1) examines the practices of broker-dealers and investment advisers in marketing and providing financial services to individual investors; and (2)evaluates investors' understanding of the differences between broker-dealers and investment advisers' financial products and services, duties, and obligations.
The Study's main purpose was to provide a factual description of the current state of the investment advisory and brokerage industries and not to make any policy recommendations. Its bottom line: The industry is composed of heterogeneous firms that provide a range of services and are engaged in a variety of relationships with one another. Partly because of the diversity of the business models and services, investors typically fail to distinguish broker-dealers and investment advisers as defined in federal regulation. Despite confusion about this, the investors surveyed expressed high levels of satisfaction with the services they receive from their own financial services providers. They also reported relatively long-term relationships with their financial services providers.
The Report presents a wealth of information on investment advisers, broker-dealers, dual registrant firms and their compensation structures that can be the basis for informed policy-making. The information is largely obtained through review of regulatory filings, documents supplied by some firms (many firms did not respond to the survey's repeated requests for documents), documents obtained online, and volunteer interviews.
The information from investors came from a national online household survey (654 households responded) and focus groups. The survey asked participants about their beliefs about the differences between investment advisers and broker-dealers and their experiences with different types of financial services professionals. It is important to note, as the Report makes clear, that because the participants in the household survey came from RAND's American Life Panel (an internet survey group), they tend to have more education and income than the broader U.S. population, and the survey likely overstates the levels of financial knowledge, experience and literacy of the U.S. population at large.
The Report also contains informative descriptions about firm disclosures involving the differences between investment advisers and broker-dealers, conflicts of interest, and compensation structure.