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Investor and Industry Perspectives on Investment Advisers and Broker-Dealers

Investor and Industry Perspectives on Investment Advisers and Broker-Dealers

Angela A. Hung
Noreen Clancy
Jeff Dominitz
Eric Talley
Claude Berrebi
Farrukh Suvankulov
Sponsored by the United States Securities and Exchange Commission
Copyright Date: 2008
Edition: 1
Published by: RAND Corporation
Pages: 228
  • Cite this Item
  • Book Info
    Investor and Industry Perspectives on Investment Advisers and Broker-Dealers
    Book Description:

    In theory, financial professionals are relatively distinct: A broker-dealer conducts transactions in securities on behalf of itself and others; and an investment adviser provides advice to others regarding securities. Different laws regulate each type of professional, but boundaries have blurred. This report examines current business practices and investor understanding of each type.

    eISBN: 978-0-8330-4784-7
    Subjects: Law

Table of Contents

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  1. Front Matter
    (pp. i-ii)
  2. Preface
    (pp. iii-iv)
    Robert Reville and Michael Greenberg
  3. Table of Contents
    (pp. v-viii)
  4. Figures
    (pp. ix-x)
  5. Tables
    (pp. xi-xii)
  6. Executive Summary
    (pp. xiii-xx)
  7. Acknowledgments
    (pp. xxi-xxii)
  8. Abbreviations
    (pp. xxiii-xxiv)
  9. CHAPTER ONE Introduction
    (pp. 1-6)

    A 2005 rule by the U.S. Securities and Exchange Commission (SEC), “Certain Broker-Dealers Deemed Not to Be Investment Advisers” (SEC, 2005) sought to clarify which of a broker-dealer’s investment advisory activities are subject to regulation by the Investment Advisers Act of 1940 (SEC, 2005; 54 Stat. 847). The 1940 act regulates activities of investment advisers, whereas the Securities Exchange Act of 1934 (48 Stat. 881) regulates the activities of broker-dealers, who are also subject to oversight by self-regulating organizations (SROs). The 1940 act (§202[a][11]) defines aninvestment adviseras

    any person who, for compensation, engages in the business of advising...

  10. CHAPTER TWO Regulatory and Legal Background
    (pp. 7-22)

    To set the stage for subsequent analysis, it is important to have a basic understanding of key aspects of the legal and regulatory landscape within which broker-dealers and investment advisers navigate. This chapter describes the main features of that terrain. In the first part of the chapter, we offer the central highlights of the regulatory environment, first for broker-dealers, then for investment advisers. We focus on key policy issues related to fee structures, the rendering of advice, and the 2005 rule change that are most relevant to this research project.¹ We conclude with a summary of the results of interviews...

  11. CHAPTER THREE View of the Industry from Published Sources
    (pp. 23-34)

    To further examine the business practices of investment advisers and broker-dealers, we reviewed the academic literature in economics and business, with a focus on finance, industrial organization, contracts, law and economics, and management and marketing in the financial industry. We also surveyed trade journals, financial media, and national news media.¹ Because practices in the financial sector have been changing rapidly, we focused on studies published in the past five years. Our aim in undertaking this review is to address our two basic research questions: What are the current business practices of investment advisers and broker-dealers (at least as reflected in...

  12. CHAPTER FOUR Insights from Industry Data
    (pp. 35-62)

    We report in this chapter on a large-scale analysis of data derived from regulatory filings made by investment advisers and broker-dealers. We use these data to describe relevant aspects of the current state and recent evolution of the investment adviser and broker-dealer industries, focusing attention on the services that these provide and the relationships among them. This analysis reflects the best available empirical evidence on systematic patterns of activities, affiliations, and business growth among the many thousands of firms that the data describe.

    All of the administrative data for this study came from regulatory filings submitted by registered investment advisers...

  13. CHAPTER FIVE Documentation and Information Provided by Firms
    (pp. 63-86)

    To better inform our description of current practices in the industry, we collected and examined business documents used by selected investment advisers and broker-dealers sampled from the complete listing of firms in the administrative databases analyzed in Chapter Four. We also conducted 34 interviews with financial professionals from brokerage and investment advisory firms. We collected this information to address the following questions:

    How do firms interact with current and prospective clients, especially with respect to the provision of services and the presentation thereof?

    How do firms operate to provide these services, including interactions with other financial service providers?

    What do...

  14. CHAPTER SIX Investors’ Level of Understanding
    (pp. 87-114)

    The preceding chapters have focused on addressing our first research question by examining current business practices of investment advisers and broker-dealers. We now turn to the second research question of what investors understand about a range of issues, including whether investors understand distinctions between broker-dealers and investment advisers. We also seek to learn about their experiences interacting with the financial service industry and their expectations of service provided by individual professionals and firms in the financial service industry. We used two main avenues to make queries of investors. We administered a large-scale, national household survey, and we conducted six intensive...

  15. CHAPTER SEVEN Conclusions
    (pp. 115-118)

    This report provides a factual description of the current state of the investment adviser and broker-dealer industries. Specifically, the report addresses two primary questions:

    What are the current business practices of broker-dealers and investment advisers?

    Do investors understand the differences between and relationships among broker-dealers and investment advisers?

    Based on a large-scale empirical inquiry of the broker-dealers and investment advisers, we have characterized the current industry along a number of dimensions—including size, level of assets, clientele, nature of services and fees, and disclosures—to identify the distinctions between investment advisers and broker-dealers. We also gave special attention to the...

  16. APPENDIX A Descriptions of Regulatory Filings, Data Sets, and Use of the Data to Identify Dual and Affiliate Activity
    (pp. 119-126)
  17. APPENDIX B Other Retail Providers of Financial Services
    (pp. 127-128)
  18. APPENDIX C Attributes of Investment Advisers and Broker-Dealers
    (pp. 129-152)
  19. APPENDIX D Additional Detail on Sampling Method of Document Collection
    (pp. 153-160)
  20. APPENDIX E Disclosures by Type and Information Source
    (pp. 161-164)
  21. APPENDIX F American Life Panel
    (pp. 165-166)
  22. APPENDIX G Detailed Results of Household Survey and Focus Groups
    (pp. 167-184)
  23. APPENDIX H Supplemental Analysis of Industry Data from 2001 to 2006
    (pp. 185-198)
  24. References
    (pp. 199-204)