Brokers Sell Products Not Advice

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We, like many other advisors, took the time to respond to the Securities and Exchange Commission (SEC) and comment on their latest regulatory proposals in our three articles:

  1. New SEC Advice Rule Abandons Fiduciary Standard For Brokers
  2. NAPFA Challenges the Securities and Exchange Commission
  3. Is Financial Advice Fundamental or Incidental With Your Advisor?

Knut Rosta, another advisor, has written his own great critique of the current situation in “The SEC Isn’t Giving Us Straight Talk ” in which he wrote:

Broker and advisor roles were well understood for years, until the conflation of the two began. Law professor Arthur Laby recounts how broker-dealers (BDs) began shedding their stockbroker title in the early 1980s for various “trusted advisor” titles. Examples abound. One firm advertised, “total financial planning.”

A Consumer Federation of America paper last year showed how BDs tell investors they’re trusted advisors, and then tell the courts they’re just sales people. Brokers lead a double life.

While advertised as trusted advisors and presumed to have been recruited, obliged, trained and compensated to advise, the fact is brokers do none of this. They distribute products and represent manufacturers.

This matters. Laby notes, “Advertising works [by creating] a positive emotional reaction” such as warmth that is stimulated by words or pictures of “friendship, caring, or tenderness.”

So there’s no surprise, in Washington anyway, when we hear again and again that the public misunderstands what brokers and advisors do. After 35 years of advertising brokers’ trust and confidence and “caring,” it’s obvious most investors don’t know BDs’ main function is to distribute products. This disclosure must be an “amber alert.” Anything less is not serious.

Rosta’s critique is both eloquent and accurate.

Rosta goes on to complain that the SEC’s new disclosure rules are incomprehensible. They allow brokers exclusive legal use of the term “best interests” while never defining the term but explicitly stating that whatever it means, it does not require a fiduciary standard of care.

That the average consumer is confused by the marketing from behemoth brokers I understand.

Our mission in these articles is to ensure that no one reading Marotta On Money misses the distinction.

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President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.