February 2006
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Vocation, vocation, vocation

CU's President Jim Guest.
WHAT'S IN A NAME? All paid financial advisers should be subject to the same rules.
A piece of land in a friend's neighborhood was sold to a developer, and before long a McMansion cast a shadow over the charming view. Soon after the new owners moved in, leaky windows had to be replaced and the stucco coating of the garish house began to crack. Turns out the developer was a former surgeon from Russia. One neighbor said he wouldn't trust his hernia operation to a builder, and we shouldn't expect a solid house from a doctor.

But what about professionals whose title implies that they're governed by the same ethical principles that guide the rest of their profession? We rely, in part, on whatever body grants licenses for and monitors that profession.

Investor beware. When our reporter was investigating bargain financial advisers for our February 2006 report, she turned up a particularly worrisome fact about financial advisers, which you should keep in mind as you read the report and when you seek advice: Not all financial professionals are subject to the same stringent regulations. Advisers, who hold the keys to an increasing number of our economic futures, go by a wide array of soundalike titles, including financial planner, investment adviser, financial adviser, financial consultant, and wealth manager.

There may be huge differences, however. “Broker-dealers”--you may know them as stockbrokers--go by a number of titles. They work mostly for brokerage firms trading stocks, bonds, mutual funds, and other financial instruments, and are exempt from the federal Investment Advisers Act of 1940. That act defines the various terms in the investment arena and regulates investment companies and advisers. It exempts broker-dealers who give advice that is “solely incidental” to their primary business and who don't receive any special compensation for the advice. That means they don't have to fully disclose how they're paid or reveal conflicts of interest that might bias their recommendations. Nor are they subject to the same stringent rules regarding fiduciary duty--that is, placing a client's interests ahead of their own--as are other advisers.

In April 2005 the Securities and Exchange Commission defined “solely incidental” as actions that are “in connection with and reasonably related to” their brokerage activities. Consumer groups, including Consumers Union, which publishes this magazine, maintain that what the SEC interprets as incidental can actually involve financial planning advice that should fall under the law. Services that clearly include extensive investment advice, such as which stocks and bonds to trade and when, should be governed by the same standards of fiduciary and disclosure obligations as other financial planning. It shouldn't matter whether giving that advice takes up the bulk of the broker's day or is incidental to other activities.

At the minimum, you should ask anyone whom you pay for financial advice, “Who pays you and how--do you earn a commission or a straight fee or both? What conflicts of interest do you have?”

A solid financial house starts with the right builder.
Jim Guest's signature.

Jim Guest
President