Many Brokers Offer Financial Advice They Shouldn't Give

IF YOU WALK INTO a brokerage and ask for financial advice, chances are the staff will offer to help with anything that's on your mind. But that doesn't mean that they're qualified to help — or that they're particularly good at it. As we recently discovered, much of the advice brokers are giving to would-be clients is off the mark. And according to some critics, some of their offers even violate SEC rules.

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:

College Savings

Our twin sons are less than two years away from attending college. That means they aren't great candidates for a 529 college-savings plan, because they don't have much time to take advantage of the plan's tax-free earnings. But brokerages can collect hefty commissions by enrolling clients in such plans. So — surprise — they often advised us to join up. They also steered us to state-sponsored plans with which they had special fee arrangements, even when another state's plan was the better deal for us. Got it right: Bank of America, Dreyfus, Morgan Stanley, Wachovia. Missed the mark: Merrill Lynch, Northwestern Mutual, Smith Barney

Life Insurance

Because of other arrangements we've made, we don't need life insurance to protect our family. But many brokers didn't do the due diligence to figure this out, insisting that we needed more coverage. It's probably just a coincidence that insurance is a big commission generator. Got it right: Northwestern Mutual, Wachovia. Missed the mark: Bank of America, Merrill Lynch, Smith Barney

Financial Planning

According to some interpretations, a broker isn't supposed to offer a comprehensive financial plan unless he or she has additional credentials. Some brokerages disagree. In practice, however, they act as though they're carefully sidestepping the rules. A frequent refrain: "This is identical to the help you'd get from a financial planner." Legit or not, we were skeptical. Got it right: Dreyfus, Morgan Stanley, Northwestern Mutual Missed the mark: Bank of America, Charles Schwab, Merrill Lynch, Smith Barney, Wachovia

Are You a Fiduciary?

It's an important question. A fiduciary has to put his client's financial interests above his own and his firm's. But every broker but one either botched the answer or gave us a blank look. The exception: A broker at Dreyfus, when asked whether he would be our fiduciary, answered, "No, but I play one on TV."

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.

Picking an Advisor

THE "FINANCIAL ADVISOR" label fits an army of experts with a bewildering range of titles. But whether you're considering hiring a big brokerage or a neighbor who works out of her garage, some of the same tips apply. Below, a newcomer's guide. Know What You Want A person who wants basic investment guidance has different needs from someone looking for help on everything from taxes to estate planning. If you're comfortable managing your own investments but want a wide range of other advice, you may want to meet with a financial planner who charges an hourly rate and can give you a "road map." If your top priority is investment advice, you might do better with a broker. Find Out How They're Paid Insist on full disclosure of where your prospective advisor's compensation comes from and how much you'll pay each year. Some advisors earn commissions or incentives based on the products they sell. Others charge flat rates, hourly rates or annual fees of a percentage of your assets. The fee-based models aren't always the cheapest: Someone who doesn't trade often may be better off paying commissions. Be the CSI Customer You can determine what your would-be counselor's titles mean at www.cfp.net/learn. (Click "Terminology and Credentials.") Ask for references from other clients. If you're considering hiring a broker, find out whether he has ever been disciplined by going to www.nasd.com and clicking "BrokerCheck," or by calling 800-289-9999. Call Them to Account Before you sign on with a brokerage firm, find out whether you'll have an "advisory" account, overseen by a registered investment advisor. In such an account, the advisor has a fiduciary duty to you, meaning she has to put your financial interests ahead of her firm's profit motive. A standard brokerage account isn't held to the same obligations. Look for a Good Fit In the end, picking an advisor can come down to chemistry. Shop around for someone whose values and investment style match yours, and bring your spouse along. And for every question you ask, an advisor should ask you a dozen about your true financial health, history and investment needs. Time-consuming? Sure, but it takes in-depth information to deliver a comprehensive financial plan that actually works.

(Additional reporting by Megan Barnett)

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