Would a broker lie to you?

Marketplace Staff Mar 23, 2007

TESS VIGELAND: A few months ago, Dyan Machan needed some financial advice. So she visited several brokerage firms that offered financial planning.

DYAN MACHAN: I would walk in cold to the broker dealer office and say, “I have a couple of kids, I just received a $250,000 settlement from the divorce, and I need help. I need help investing for the long term, planning for my kids’ education. I need tax planning, I need retirement planning, I need help.

VIGELAND: All true. What Machan didn’t tell them is that she’s also a writer for Smart Money Magazine, and she was investigating whether the brokers followed the arcane rules that govern how they give out more general financial advice.

MACHAN: The idea was also see what the quality of advice is that they would be giving me. But that would be secondly. The first idea was really to see if they were really following the rules — which I suspected they weren’t, because the rules were tough to follow.

VIGELAND: And what is the rule?

MACHAN: The rule is that broker dealers — if they’re going to give advice, if they’re not registered investment advisors — they have to disclose that they’re offering you a brokerage account and make it clear to the consumer that their interests may not always be the same as yours. Moreover, they’re not supposed to say that they are financial planners and that they can do financial planning. And if you adhere exactly to the rules, the answer should be no. But that’s not, of course, what I found out. Because, you know, as you would expect they wa tn to make the sale and the rules are also tricky to follow.

VIGELAND: Talk to us a little bit about why it is that they can’t call themselves financial planners.

MACHAN: Brokers charge commissions for, that’s basically how they’ve always been paid historically. Until 1999 – in 1999, they changed everything at they let them start charging fees. Well, they wanted to also offer some advice along with it. But then, whoa – registered investment advisors, financial planners were unhappy. Other people that give advise for a living. All of a sudden you’ve got all these brokers doing what they’re doing. So the SEC thinks, “What are we gonna do about this, complaints from all sides?” And they came up with this compromise rule. And that’s Rule 202. And they set up this rule that says, “OK, you guys can give advise, but just not comprehensive advice. And you guys have to disclose that your interests really aren’t the same as your consumers, your customers.” Well, it’s just not realistic. When a consumer walks in and wants comprehensive investment advice, the person across the table is going to say “Well of course I can help you with that.

VIGELAND: Well, what about the advice that you got from various brokerages? What was your experience there?

MACHAN: The advice was fine in and of itself. I think many of the brokers that you’ll . . . that work for these firms are really terrific. It’s more that they . . . the rules are very hard to follow. But there’s a very clear different with what you’re getting and in the legal protection that you’ll have.

VIGELAND: So what is a consumer to do?

MACHAN: They ought to know what sort of account that they’re going to get. They should know whether it’s an advisory account or whether it’s a standard brokerage account. There’s nothing wrong with having a broker give you investment advice, as long as they understand that they do not have to tell you the conflicts of interest that they have. They do not have to disclose these things to you. So the onus is on the consumer to be able to ask all of these questions.

VIGELAND: Dyan Machan is a senior writer at Smart Money Magazine. Dyan, thanks for coaching us through this very complicated matter of what your broker should and shouldn’t do.

MACHAN: Thanks so much, Tess.

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