New disclosure rules not helping investors

In April 2005, the SEC adopted Rule 202(a)(11)-1, commonly known as the Merrill Lynch or Broker/Dealer Exemption Rule. This rule allows stockbrokers to offer services similar to that of Registered Investment Advisors (RIAs) without being held to the fiduciary and disclosure standards required of RIAs. Despite the fact that brokerage firms offering financial planning and investment ad­visory services now must make a disclosure that their interests might not always be the same as their clients’ interests, a significant number of investors are still un­aware of the differences between RIAs and stockbrokers. (Mentor Capital is an RIA.)

TD Ameritrade conducted an Investor Per­ception Study in 2006, as a follow-up to their 2004 survey, to gauge whether the new dis­closure rules have impacted investors’ aware­ness of the differences between RIAs and stock­brokers. Unfortunately, these new rules have not had much of an impact:

• 43% of investors are still unaware that brokers and RIAs offer different levels of investor protection.  (2004 survey:  41%)
• Only 26% of investors are aware that brokers are not required to disclose all conflicts of interest.  (2004 survey:  32%)
• Only 26% of investors know that only RIAs have a fiduciary responsibility to act in investors’ best interests.  (2004 survey:  25%)

Respondents to the 2006 survey made it clear that knowing the dif­ferences between RIAs and stock­brokers would impact their choice of financial advisor. 70% stated that they would not work with a broker if they knew about the differences in fiduciary and disclosure standards. However, unless the SEC adopts stronger rules that require stock­brokers to adhere to the same stan­dards as RIAs, many investors will apparently remain unaware of these important differences.