Listen Now 

WASHINGTON, D.C.///April 26, 2007///Two pieces of bad news today confirm that the Securities and Exchange Commission has been headed in the wrong direction in its regulation of financial professionals: 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; and the SEC's nearly two-year effort to heighten disclosure that fee-based brokerage accounts are not advisory accounts does not appear to be working. The two pieces of bad news come just as the Commission is expected to appeal a March federal court ruling overturning the Commission's controversial "broker dealer rule."

According to a new Opinion Research Corporation (ORC) national opinion survey released today by the Zero Alpha Group (ZAG) and the Consumer Federation of America (CFA), fewer than one out of three U.S. investors (30 percent in 2007) correctly understand that the "primary service" provided by stockbrokers is the buying and selling of stocks, mutual funds, bonds, etc., not investment advice. This is virtually unchanged from the 26 percent of U.S. investors who responded in the same manner when this same question was posed in a 2004 ZAG/CFA survey.

Although stockbrokers are salespeople, a majority of investors (a virtually unchanged 54 percent in 2007 and 53 percent in 2004) look to stockbrokers for more than transactional assistance, with 29 percent (almost identical to 28 percent in 2004) saying that financial advice is the "primary" service offered by stockbrokers and 25 percent (unchanged from 2004) saying advice and transaction assistance are equally important services provided by stockbrokers.

The Securities and Exchange Commission has for many years permitted stockbrokers to offer extensive investment advice services without regulating them under the stricter standards that apply to other investment advisers. The so-called "broker dealer" rule recently rejected by the courts expanded that loophole by permitting brokers to charge for that investment advice and still escape regulation as advisers. As part of that rule, the SEC in May 2005 required new and supposedly tougher disclosure on fee-based brokerage accounts to alert investors to the fact that these accounts are not advisory accounts and may be subject to conflicts of interests.

Steve Lugar, managing director, BHCO Capital Management, Dallas, TX., 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 advice 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."

Barbara Roper, director of investor protection, Consumer Federation of America, said: "Investors deserve a regulatory approach that they can understand, where financial professionals who use the same titles and offer the same services are subject to the same high standards. The recent court decision over-turning the fee-based brokerage account rule offers an opportunity for the SEC to adopt such an approach. As the SEC confronts these issues, it must acknowledge that disclosure alone is not an answer. What is needed is true functional regulation. As the survey makes clear, investor support for such an approach is overwhelming."

Gregory Carlson, founding principal, Carlson Capital Management (CCM), Northfield and Hastings, MN., said: "This is very simple: Most U.S. investors think that stockbrokers and financial planners who provide investment advice should be governed by equally stringent investor protection rules. The latest Zero Alpha Group/Consumer Federation of America survey is a strong and direct challenge to the wisdom of any appeal by the SEC of the federal court decision overturning its widely criticized and ineffective 'broker dealer rule.'"

Scott Sarber, vice president, Petersen Hastings Investment Management (PHIM), Kennewick, WA., said: "The 2004 and 2007 ZAG/CFA surveys provide before-and-after 'snapshots' of investor awareness, which does not appear to reflect any real improvement after two years of the enhanced disclosure required by the SEC. The picture that emerges from this data is not pretty when it comes to making sure that American investors understand who they are dealing with and on what terms."

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 broker dealer rule was developed in 1999 in response to the advent of fee-based brokerage accounts. The rule exempted the brokerage fee-based accounts from regulation under the Investment Advisers Act, so long as the broker disclosed that the account was a brokerage account, did not have discretionary authority over the account, and gave only advice that is "solely incidental" to the broker's primary business of buying and selling securities. Unfortunately, when the SEC first proposed the rule, it had never defined or enforced the "solely incidental" standard.

When the agency finalized the so-called "broker dealer" rule in 2005, it defined all discretionary accounts as advisory accounts (not just those that are fee-based), it defined financial planning as an investment advisory service, and it strengthened the disclosure required on fee-based accounts. The final rule release also included a staff interpretation of the solely incidental to practice exemption. Unfortunately, the staff interpretation of the solely incidental to language was so broad virtually any financial services activity would qualify. Also, the staff quickly developed an interpretation of the financial planning rule that exempted virtually all planning services offered by brokers. As a result, brokers remained free under the revised rule to offer extensive investment advice without being subject to the fiduciary duty or disclosure obligations of the Investment Advisers Act.

KEY SURVEY FINDINGS

Other highlights of the 2007 Zero Alpha Group/Consumer Federation of America survey include the following:

• Nine out of 10 investors (92 percent in 2007) 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. This is essentially unchanged from the 91 percent of U.S. investors who responded to the same question in the same way in 2004.


• Nearly nine out of 10 investors (86 percent in both 2007 and 2004) 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 some form of inducement to push the investment product on his or her customers.


• Over half of investors (54 percent) say they would be much less (31 percent) or somewhat less (24 percent) likely to use a stockbroker providing investment advice if that individual is subject to weaker investor protection rules than a financial planner. Overall, the response level declined somewhat from the 2004 survey finding of 65 percent. In the 2007 survey, better educated and wealthier investors indicated they were less likely than those with lower levels of education or income to use stockbrokers who are subject to weaker rules. While only 45 percent of those with a household income of $25,000 or less would be less inclined to use such a stockbroker, 60 percent of those with household income of $75,000 or more say they would be much less or somewhat less likely to do so.


• More than half of all Americans (54 percent) -- including 63 percent of those with household incomes ranging from $25,000 up to $50,000 a year -- now describe themselves as investors.

For the full 2007 ZAG/CFA survey findings, please go http://www.zeroalphagroup.com on the Web. For the full findings of the 2004 ZAG/CFA survey, go to http://www.zeroalphagroup.com/news/cfazagsurvey102704.cfm.

SURVEY METHODOLOGY

The 2007 ZAG/CFA survey was conducted by Opinion Research Corporation among a sample of 2,052 adults (1,010 men and 1,042 women) age 18 and over, living in private households, in the continental United States. Interviewing was completed during the period of April 12-16, 2007. The majority of the questions were asked only of the 1,073 adults who described themselves as investors.

The 2004 survey was conducted by ORC among a sample of 2,068 adults (993 men and 1,075 women) age 18 and over, living in private households in the continental United States. Interviewing was completed during the period October 14-18, 2004. The majority of the 2004 questions were asked only of the 1,044 adults who described themselves as investors.

Both sets of completed interviews were weighted by four variables: age, sex, geographic region, and race, to ensure reliable and accurate representation of the total adult population. The margin of error for both surveys at a 95 percent confidence level is plus or minus 3 percent for the samples of investors. Smaller sub-groups will have larger error margins.

ABOUT ZERO ALPHA GROUP AND CFA

Founded in 1995, the Zero Alpha Group (http://www.zeroalphagroup.com) is an international network of independent investment advisory firms that manage a total of more than $7 billion in assets. The nine current members of the Zero Alpha Group -- including BHCO, CCM and PHIM -- 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 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.

The Consumer Federation of America (http://www.consumerfed.org) is a non-profit association of approximately 300 organizations that, since 1968, has sought to advance the consumer interest through research, advocacy and education.

CONTACT:   Patrick Mitchell, (703) 276-3266 or .