Many Brokers Offer Financial Advice They Shouldn't Give

With plenty of boomers seeking more advice as they careen toward retirement, full-service brokerage firms are attracting new money from investors at a brisk pace, and many brokers now label themselves "financial advisors." Still, one important difference separates brokers from many of their competitors: Registered investment advisors and some financial planners are required to be fiduciaries — that is, to act in their clients' best financial interest. But brokers have no such duty. Because of that distinction, some consumer advocates argue that brokers shouldn't be allowed to offer broader financial-planning services. Indeed, an SEC rule issued in 2005 — known as Rule 202 — requires brokers to let clients know that they aren't fiduciaries. It also says that in most cases, brokers can't sell soup-to-nuts financial plans or present themselves to clients as "financial planners."

Where does that leave investors, besides confused? To find out, SmartMoney conducted an informal survey. Our reporter introduced herself as a prospective client, visiting eight brokerages that were either within walking distance of our Manhattan office or a short drive from her New Jersey home. She presented herself as a divorcee who had received a legal settlement and needed advice about investing, tax and estate planning, college savings, retirement and insurance (all true, by the way). She left out only that she would be writing about the experience. Of course, our field test was hardly scientific. But we found out that in their new roles, many brokers seemed just as confused as their customers. The good news: We picked up a lot of attractive graphs and pie charts, and a couple weeks' worth of free coffee.

Some of the highlights:

When we tallied our results, one thing was clear: The advice we'd received had ranged all over the map. Smith Barney thought we should have 95% of our assets in equity-only mutual funds. Merrill Lynch advocated 56%. The annual fees ranged from 0.5% of our assets at Charles Schwab up to 2.25% at Morgan Stanley — and that doesn't include the sales loads on some of the products they recommended. Meanwhile, the best advice we got came from a broker who had the added training of a registered investment advisor — and also happened to be a total jerk. One thing's certain: Given the current state of affairs, consumers will continue to have a hard time figuring out who's qualified to help.

(Additional reporting by Megan Barnett)