Confused about what the difference is between a broker and an investment adviser?

Me too! Just trying to figure out what’s happening with regulations and disclosures will only further confuse you, but here’s a list of keywords to google later: Merrill Lynch Rule, RAND Report, Cutting Through The Confusion.

There are various lobbying efforts, lawsuits, etc happening because they (huge brokers, investment advisers, consumer groups) all want a share of the “pie”. I think the main reason for the confusion has to do with politics and capture hypothesis in regulation, with the result being that this battle may never end until the structure of the financial services industry changes (and that may not happen in my lifetime).

So what is the take-away? It’s actually quite simple: A consumer must continually ask a financial services provider (broker, financial consultant, etc) if they are providing advice and service as a fiduciary.

In our industry, a fiduciary must advise and act in a client’s best interest, while a non-fiduciary must advise and act in a manner deemed suitable. Obviously, from a client perspective, suitability is a lower standard.

Now the problem is that some folks out there state that they sometimes provide services and advice according to the suitability standard, and sometimes according to the fiduciary standard. And if you follow the rule above, it makes for difficult conversation if every other question you ask is “are you acting as a fiduciary right now?”.

Let me be the first to propose an easy solution to all these lawsuits and convoluted regulations: When services and advice are given under the fiduciary standard, the person has to wear a bright green button on their collar; when given under the suitability standard, the person has to wear a red button on their collar.

And on the phone, two different tones can be added to the line in a similar fashion to the familiar “beep” you hear when somebody calls you on a recorded line. A website could have a small green or red flashing image in the top right corner of the web page.

So if you’re working with a guy that is constantly switching buttons, or you hear a melody of tones on the phone line — you’ll surely know you’ve got a flip-flopper on your hands.

That’s it, problem solved!

What happens to my account when the broker goes bankrupt?

For those that have brokerage accounts with Bear Sterns, they may be wondering if they will get all their money back due to the near bankruptcy and recent buyout proceedings. Luckily, there are insurance and regulations set up to protect individual investors in many, but not all situations.

Bear is supposed to keep individual account holdings separate from their operating holdings, but if you lose funds due to negligence or misappropriation of funds you will likely be covered by $500,000 of SIPC insurance. This insurance does not protect investors from fraud or market related investment losses. Also, certain “exotic” investments like futures contracts and other derivatives may not be covered.

It’s important to note that FDIC insurance is completely separate and operates in a slightly different way. To find out more on SIPC check with your custodian and research the details here. Custodians/Brokers often carry additional insurance to cover accounts beyond the SIPC limits - yet another issue that should be checked on.

Hello world!

I often have many personal thoughts on financial planning issues and would like to share them — so I’ve created this blog as a means to record these little “nuggets” of information. My posts may eventually interest a variety of people and although I may mention issues relating to money and finance, I have no intention of ever including investment advice on this blog.

Cheers!