Survey: In Blow To Sec Rule Proposal, 9 Out Of 10 U.S. Investors Back Equally Tough Broker, Investment Adviser Regulation Listen Now 

Commission's So-Called "Merrill Lynch Rule" Would Only Further Confuse Public; Two-Thirds Say They Would Be Less Likely to Do Business With Looser-Regulated Broker

Click here to see full results of public opinion poll.

WASHINGTON, D.C.//October 27, 2004///More than nine out of 10 U.S. investors (91 percent) think that stockbrokers and financial planners who provide investment advice services should be subject to the same investor protection rules, according to a new Opinion Research Corporation (ORC) survey released today by the Zero Alpha Group (ZAG) and the Consumer Federation of America (CFA).

The results of the ZAG/CFA survey of more than 1,000 investors directly challenge the assumptions behind a pending U.S. Securities and Exchange Commission (SEC) rule that would allow stockbrokers to continue to provide investment advice under weaker rules than are in place for investment advisers. A major problem for the Commission may be seen in the fact that American investors already are seriously confused about the differences between stockbrokers and investments advisers. Only a quarter of investors (26 percent) understand that the primary role of stockbrokers is to buy and sell investment products; more than half of investors (53 percent) mistakenly think that investment advice is a key service offered by stockbrokers.

Other key results: Nearly nine out of 10 investors (86 percent) think stockbrokers should be required to disclose any incentives or other forms of compensation (such as cash payments, vacations, etc.) they receive to push particular products prior to the purchase of the investment; and about two-thirds of the surveyed investors (65 percent) said that they would be less likely to do business with a stockbroker providing investment advice if that individual was subject to weaker investor protection rules than a financial planner providing the same services.

Savant Capital Management Managing Director Brent Brodeski of Rockford, IL., said: "These survey findings make a powerful case for the SEC to scrap its rule and go back to the drawing board. The Commission should define what exactly it means for a broker to offer advice that falls outside of the tougher regulatory standards that are demanded of investment advisers. It makes no sense to disadvantage investors with a two-tiered regulatory structure in which they have fewer protections and weaker disclosure if they happen to get their investment advice from a stockbroker."

Consumer Federation of America Director of Investor Protection Barbara Roper said: "The message here is clear: The SEC is completely off track in its approach to regulation of advisory services offered by broker-dealers, and the pending rule would do nothing to fix that. The survey tells us, for example, that the rule's disclosure requirement is meaningless. What good can it possibly do to tell investors that an account is a brokerage account, if most investors mistakenly believe that brokers are advisers? It also tells us that the Securities Industry Association is just flat wrong when it asserts that no further regulation of these accounts is needed because investors understand the differences between brokers and advisers. And finally, it tells us that investors neither understand nor support a system in which financial professionals who offer the same type of services are subject to different rules."

J.E. Wilson Advisors President James Wilson of Columbia, S.C., said: "The public clearly wants an even-handed approach to regulation of stockbrokers and investment advisers who are doing the same thing. That's a common-sense approach and it also is reflected in the vast majority of investors wanting to know when stockbrokers who are providing investment advices are getting special inducements to push their clients in the direction of certain products. If stockbrokers want to do business like investment advisers, the SEC should impose on them the rules that go along with being an investment adviser."

For years, the SEC used method of compensation to draw the regulatory dividing line between brokers and advisers, relying on the fact that advisers traditionally charged fees for their services, while brokers charged commissions. The Commission's pending rule proposal was developed in response to the advent of fee-based brokerage accounts. The rule exempts the brokerage fee-based accounts from regulation under the Investment Advisers Act, so long as the broker discloses that the account is a brokerage account, does not have discretionary authority over the account, and gives only advice that is "solely incidental" to the broker's primary business of buying and selling securities. Unfortunately, the SEC has never defined or enforced the "solely incidental" standard, and the pending rule does nothing to change that lack of clarity.

KEY SURVEY FINDINGS

The key findings of the ZAG/CFA survey are as follows:

• Regulation of stockbrokers and financial planners is an issue for one out of two American adults - not just wealthy individuals. Half of all adults - including 47 percent of those with household incomes ranging from $25,000 up to $50,000 a year - now classify themselves as investors.
• Although stockbrokers are legally salespeople, the majority of investors (53 percent) look to stockbrokers for more than transactional assistance, with 28 percent saying that financial advice is the "primary" service offered by stockbrokers and 25 percent saying advice and transaction assistance are equally important services provided by stockbrokers. Only 26 percent correctly understand that the "primary service" provided by stockbrokers is the buying and selling of stocks, mutual funds, bonds, etc., not investment advice.
• Nine out 10 investors (91 percent) believe that the same investor protection rules should apply to both stockbrokers and financial planners when they offer the same kind of investment advice services.
• Nearly nine out of 10 investors (86 percent) think a stockbroker should be required to disclose prior to an investor purchasing an investment product (such as a mutual fund) any incentives or other forms of compensation (such as cash payments, vacations, etc.) that the broker is receiving to push the same investment product on his or her customers.
• Two-thirds of investors (65 percent) say they would be much less (36 percent) or somewhat less (28 percent) likely to use a stockbroker providing investment advice if that individual is subject to weaker investor protection rules than a financial planner.
• On questions of regulation, the views of affluent investors (household incomes of $75,000 or higher) and educated investors (with college or higher degrees) largely mirror the broader population of U.S. investors.

Complete survey findings are available online at http://www.zeroalphagroup.com.

SURVEY METHODOLOGY

A total of 2069 adults comprising 1016 men and 1053 women 18 years of age and older, living in private households in the continental United States, were interviewed between October 14-18, 2004 for the purpose of the CFA/ZAG survey. Of the overall sample, a total of 1,044 (50 percent) identified themselves as investors. Completed interviews were weighted by four variables: age, sex, geographic region, and race, to ensure reliable and accurate representation of the total population, 18 years of age and older. Results of any sample are subject to sampling variation. The magnitude of the variation is measurable and is affected by the number of interviews and the level of the percentages expressing the results. At 1,000 interviews, the margin of error for the survey is plus or minus 3 percent.

ABOUT THE GROUPS

Founded in 1995, the Zero Alpha Group, which is not an investment advisory firm itself, was created to serve as a nationwide network for eight independent investment advisory firms that manage a total of more than $3.5 billion in assets. Members of the Group are committed to providing objective, long-term private wealth management solutions to investors, focusing on asset allocation and a structured, quantitative approach to investing. The eight firms in the Zero Alpha Group network share a common philosophy about investing and client service - a commitment to passive, tax-managed investment strategies while providing an independent financial planning solution for investors. Visit ZAG online at http://www.zeroalphagroup.com.

The Consumer Federation of America is a non-profit association of some 300 pro-consumer groups that seeks to advance the consumer interest through research, education and advocacy.

CONTACT: Stephanie Kendall, (703) 276-3254 or skendall@hastingsgroup.com.