The RAND Report’s Unfortunate Conclusion
The RAND Report is the result of a two-year study on the broker-dealer and advisor industry done by the Securities and Exchange Commission. A few years back somebody got worried that the line between brokers and advisors was getting blurred and asked the SEC to investigate. The SEC’s response was a monster report–219 pages long in its current pre-publication form. I e-mailed it to my Kindle which made it much easier to wade through.
The broker/RIA line wasn’t only getting blurred with clients–at one point, the CFP was seriously considering relinquishing their fiduciary duty, which would have been a big step backwards in the arena of client advocacy and professional responsibility. The RAND report is about RIAs not CFPs but their conclusions probably apply to both designations.
The report attempts to answer two questions:
- What are the current business practices of broker-dealers and investment advisers?
- Do investors understand the differences between and relationships among broker-dealers and investment advisers?
After 200+ pages of filler insightful analysis, the report draws several conclusions:
- Most small financial firms offer either RIA or broker services but not both, the distinction sometimes gets blurred as the firms increase in size.
- Laws and regulations between brokers and advisors are indeed eroding today.
- Investors do not understand the different functions and fiduciary responsibilities between advisors and broker-dealers.
- When the importance of fiduciary duty is explained, investors struggle to comprehend the distinction and–if they do understand it–don’t think it matters.
I think the last point is the most worrying. Regulations can be changed and investors can be educated, but if a fully informed investor simply doesn’t care about the differences between RIAs and brokers… well there’s not much you can do about that.
So if this report is correct, what does it mean for the industry? It means all of the hard work that went into getting your RIA (and possibly CFP) probably wasn’t worth it. Investors don’t care and would just as soon use a commission-based broker. It also means Mike was right back in March when he said the CFP “code of ethics is silly and pointless”–at least in the eyes of clients.
That’s disturbing.
Bill said,
January 31, 2008 at 8:22 am
The RIA is not a designation; rather it is a registration with either the State or SEC to receive compensation for the delivery of investment advice. All one basically needs is to complete the Series 65 examination and submit disclosure forms (Form ADV) to the regulatory authority.
In fact, RIAs are forbidden from putting “RIA” on any materials; it must be spelled out as “Registered Investment Adviser” with either the State or SEC, lest it confuse consumers into thinking the adviser has some sort of certification or endorsement for competency.
Nevertheless, if advisers insist on upholding a fiduciary standard of care when engaging in client relationships, advisers must do a better job of educating clients and prospects about the role of a fiduciary so that they demand that standard in the industry as a whole.