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Investor and Industry Perspectives on Investment Advisers and Broker-Dealers

by Angela A. Hung, Noreen Clancy, Jeff Emmett Dominitz, Eric Talley, Claude Berrebi, Farrukh Suvankulov

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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 regarding securities. Broker-dealers and investment advisers are subject to different regulatory structures. But trends in the financial services market since the early 1990s have blurred the boundaries between them. Regulatory reform requires a clearer understanding of the industry’s complexities. The U.S. Securities and Exchange Commission asked RAND to conduct this study to examine the professionals’ current business practices and whether investors understand differences between and relationships among them. The report describes a heterogeneous industry, with firms taking many different forms and offering a multitude of services and products and with investors failing to distinguish broker-dealers and investment advisers along regulatory lines. Despite this, 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 the investor receives than from the actual financial returns arising from this relationship.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Regulatory and Legal Background

  • Chapter Three

    View of the Industry from Published Sources

  • Chapter Four

    Insights from Industry Data

  • Chapter Five

    Documentation and Information Provided by Firms

  • Chapter Six

    Investors’ Level of Understanding

  • Chapter Seven

    Conclusions

  • Appendix A

    Descriptions of Regulatory Filings, Data Sets, and Use of the Data for Identification of Dual and Affiliate Activity

  • Appendix B

    Other Retail Providers of Financial Services

  • Appendix C

    Attributes of Investment Advisers and Broker-Dealers

  • Appendix D

    Additional Detail on Sampling Method of Document Collection

  • Appendix E

    Disclosures by Type and Information Source

  • Appendix F

    American Life Panel

  • Appendix G

    Detailed Results of Household Survey and Focus Groups

  • Appendix H

    Supplemental Analysis of Industry Data from 2001 to 2006

The research described in this report was conducted by the LRN-RAND Center for Corporate Ethics, Law, and Governance within the RAND Institute for Civil Justice and commissioned by the U.S. Securities and Exchange Commission (SEC).

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