Banking and Financial Services
Congressional Newsletter
A series of periodic updates to Congress on RAND's work in banking and financial services

Do Investors Understand the Difference Between Investment Advisers and Broker-Dealers?

investment meeting

In theory, financial professionals are relatively distinct: A broker conducts transactions in securities on behalf of others; a dealer buys and sells securities for his or her own accounts; and an investment adviser provides advice to others about securities. But since the 1990s, market demands have introduced new products and services, and firms have taken many different forms, blurring these traditional distinctions.

The U.S. Securities and Exchange Commission (SEC) is charged with regulating the industry, but before embarking on reform, it needs to understand the industry's complexities. To assist in meeting this goal, the SEC asked RAND to help answer two questions: What are the current business practices of broker-dealers and investment advisers, and do investors understand the differences between broker-dealers and investment advisers? To address the first question, RAND researchers analyzed regulatory filings in separate databases representing more than 10,000 investment advisory firms and more than 5,000 broker-dealers; reviewed relevant literature, business documents, and Web sites from a sample of firms; and conducted interviews with financial service professionals and other experts. For the second question, researchers conducted a national household survey with 654 respondents and held six focus groups in September 2007 to gauge the extent to which investors understand the differences among providers of financial services.

The study confirmed that the industry is becoming increasingly complex and that firms are becoming more heterogeneous and intertwined. Given such complexity, it is not surprising that typical investors are confused about the nature of the services offered by their financial professionals. Many of those surveyed, as well as focus-group participants, did not understand the key distinctions between investment advisers and broker-dealers: their duties, titles, services, or fees. They attributed part of this confusion to the dozens of titles used in the field—including generic titles, such as financial advisor and financial consultant—and to advertisements that claim, "We do it all."

Despite this, the study showed that investors express high levels of satisfaction with the services they receive from their own financial service providers. This satisfaction was much more frequently reported to arise from the personal attention that the investor receives than the actual financial returns from this relationship.

READ THE RESEARCH BRIEF: Investment Advisers and Broker-Dealers


How Good Are We at Making Investment Decisions?

Individual financial decisionmaking is a growing policy concern, especially when it comes to planning for retirement. Over the past few decades, risks associated with providing for financial security in retirement have increasingly shifted from employers to employees as employer-provided pensions have shifted from defined-benefit (DB) to defined-contribution (DC) plans. Recent work in behavioral finance suggests that investors do not make optimal investment decisions in their DC plans. In particular, many people are vulnerable to making suboptimal 401(k) investment decisions, one of which is the failure to minimize fees. Such failures can have significant consequences. For example, an individual who pays 1.5 percent in annual fees on a $25,000 investment in mutual funds that return 7 percent per year could find that retirement portfolio reduced by almost a third over 35 years, relative to someone paying 1 percent less. As a result, there has been a great deal of legislative and regulatory interest focused on fee disclosure.

In response to a request from the Department of Labor’s Employee Benefits Security Administration, RAND analyzed results from a pair of mutual fund choice experiments that were administered to more than 1,000 survey respondents who participate in the RAND American Life Panel. RAND designed the experiments to study how fees and expenses affect investment behavior. One experiment in particular focused on assessing whether investor choices are consistent with fee-minimizing behavior when individuals choose among otherwise nearly identical mutual funds.

The study showed that, consistent with other research, most respondents have difficulty making investment decisions that maximize their expected future wealth, even when fully informed about fees and expenses. Most notably, people with high financial literacy do much better in maximizing their wealth, and the level of financial literacy may be the underlying cause of certain observed disparities. For example, lower levels of financial literacy account for differences in choice behavior between women and men. Further analysis suggests that financial literacy may affect decisionmaking through a number of pathways that reflect both fundamental skills and personal attitudes. Other findings also imply that increasing disclosure is not always necessarily better: The less financially literate may even perform worse when provided with more information. Overall, the research supports a role for financial education that builds background skills in combination with the more thoughtful design of ad hoc decision-support tools and materials to help the less financially literate.


Angela Hung and Joanne Yoong will be briefing "Investor Choices and Financial Literacy: Evidence from Mutual Fund Choice Experiments" TODAY, February 9, at 1 p.m. in 2220 Rayburn House Office Building. Please contact Kristy Anderson at or 703-413-1100 x5196 if you need further information.


The Behavioral Finance Forum (BeFi) recently became an initiative of RAND (see BeFi will be hosting an event on May 1, 2009. Please contact Nancy Camm at or 703-413-1100 x5512 for more details.


Angela A. Hung

Angela A. Hung

Angela A. Hung, Ph.D. is Director of RAND's Center for Financial and Economic Decision Making. She is the principal investigator for a project for the United States Securities and Exchange Commission that examines the differences between broker-dealers and investment advisers, and investors' understanding of these differences. Hung has also been analyzing survey data from the Health and Retirement Study and RAND's American Life Panel to study financial literacy and how it relates to investment decisionmaking. In one recent project, she compared the performance of retirement investment strategies derived from typical investment advice given by financial advisors, from optimal portfolio choice theory, and from behavioral rules-of-thumb. Her research in experimental economics focuses on how individuals incorporate different kinds of information into their decision-making processes.

Read more about Ms. Hung

Joanne K. Yoong

Joanne K. Yoong

Joanne K. Yoong, Ph.D. is an Associate Economist at RAND and the FSI Starr Foundation Fellow at Stanford University. Her main field of research is applied microeconomics, with an emphasis on finance, health and economic development. Her previous research is largely based in India and includes studies of the impact of hospital financing on doctors' incentives to deliver child-health services (in Madhya Pradesh) and the design of micro-credit loan contracts with prepayment devices to support better long-term investments in health (in Orissa State, joint with Aprajit Mahajan and Alessandro Tarozzi). As an adjunct staff member at RAND in 2007, her work investigated the use of American Life Panel survey to address issues related to financial decisionmaking.

Read more about Ms. Yoong


Lindsey Kozberg
Vice President, Office of External Affairs

Shirley Ruhe
Director, Office of Congressional Relations

Kristy Anderson
Legislative Analyst

RAND Office of Congressional Relations
(703) 413-1100 x5395


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