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RAND Corp. Issues Report on Investment Advisers and Broker-Dealers

The RAND Corporation has issued a report that was commissioned by the SEC on the investment adviser and broker-dealer industries. The SEC hired RAND to evaluate the practices and the regulatory environment for both industries and determine whether investors understand the differences. RAND found that investors are usually unable to distinguish between investment advisers and broker-dealers as defined by federal regulations, but express satisfaction with their own financial service providers.

RAND reported that most firms are engaged strictly as investment advisers or broker-dealers without any affiliations with the other, but many engaged in one type of activity and were affiliated with a firm that engaged in the other. RAND noted that the evidence suggests substantial reporting errors in the regulatory filings of financial services firms.

RAND found it difficult to untangle some of the services and business relationships of firms that were dually registered as both investment advisers and broker-dealers and those who were affiliated with other firms. The reported data did not always identify business relationships. RAND discovered inconsistencies and inaccuracies in the information that was reported. RAND said it is not surprising that typical retail investors have trouble understanding the business from which they receive financial services.

Many firms reported difficulties with providing clear disclosure. The disclosure rules are not written in a way that is readily understandable by the average investor and the information that is provided is inadequate. Many firms attempt to provide plain English booklets to assist investors but reported that investors seldom read the materials.

RAND reported that investment advisers most frequently disclosed information about their codes of ethics and fiduciary oaths in their business documents, while broker-dealers most frequently identified compensation issues. Both investment advisers and broker-dealers most frequently reported information about future performance on their Web sites.

Regardless of their confusion about the titles and duties associated with their financial service providers, investors said the most important attribute was trustworthiness. Many focus group participants with investments admitted that they were uncertain about the fees they paid for their investments and reported confusion about fees.

The purpose of the report is to help the SEC understand the changing business practices of broker-dealers and investment advisers in advance of undertaking any future regulatory reform. The report does not make policy recommendations.