Broker, Adviser, What's the Difference?

What's the difference? Probably more than you think.

"Investment advisers and stockbrokers should be subject to the same fiduciary standard of conduct -- putting a customer's interests above their own -- rather than the different governance regimes that currently apply to the two groups, the Securities and Exchange Commission recommended," according to a report published in the New York Times's "Dealbook" on Monday, and in an article by Edward Wyatt published Sunday.

You didn't know that there was a different standard? Neither do a lot of people.

As Timothy Noah reported in Slate, the distinction between brokers and investment advisers might have made sense back in the New Deal day when the SEC was created, but these days it's hard to tell the difference. And while "investment advisers" must act in their clients' best interests, "brokers" only have to "make sure that the products that they sell are suitable for their clients", as Wyatt termed it.

So... is the guy who's "managing" your investments a broker or an adviser? I don't know about mine, and you probably don't know about yours. But all of a sudden... it makes a difference, doesn't it?

The SEC's staff, in preparing the recommendation, said that "retail investors" (as Noah put it, that's "suckers like you and me") are "generally not aware" that there are different standards. And why should we be? From our perspective, advisers and brokers basically do the same thing -- tell us where, other than under the mattress, we should put our hardly-earned dollars.

Wyatt noted that the "five S.E.C. commissioners did not vote on whether to adopt the study’s recommendations, but the two Republicans issued a statement criticizing the study, saying it 'fails to adequately justify its recommendation' and 'lacks a basis' to conclude that a uniform standard would enhance investor protection."

I don't know how one would "adequately justify" this recommendation better. There are obviously lots of corporate ethical lapses that bother me, or why would I keep posting to this blog? But the ones that bother me that most, I think, are those that rely on a disconnect between what customers reasonably expect and what the corporation figures it can legally get away with.

And in this case, the disconnect is big enough to drive a fleet of New York City snowplows through it.