Today’s unanimous decision by the SEC to define the extent of investment advisory services brokers can offer without triggering regulation as advisers is the essential first step toward creating a meaningful functional distinction between brokers and advisers. Properly implemented, it will help to ensure that investors can tell legitimate advisers from salespeople masquerading as advisers and that all recipients of investment advisory services receive the same investor protections, regardless of the source of that advice.

This approach not only is consistent with the law, it is essential to achieving the SEC’s stated goal of making nature of services offered, rather than method of compensation, the key factor that determines applicability of the Advisers Act. It also has strong public support. A recent survey, commissioned by Zero Alpha Group and jointly released by CFA and ZAG, found that 91 percent of investors believe brokers who offer investment advisory services should be subject to the same investor protection rules as all other investment advisers. That same survey found a high degree of confusion among investors about the services offered by brokers.

The added clarity the SEC action promises is desperately needed. Today, financial professionals who are indistinguishable to the typical investor are subject to two very different standards of conduct. No one in their right mind would intentionally set out to create such a marketplace, but that is exactly what the SEC has done by continuing to rely on method of compensation to draw the line between brokers and advisers long after it had long ceased to perform that function effectively. The confusing marketplace we see today is the direct result of misguided past SEC decisions: to allow brokers to offer financial planning, which is clearly an advisory service, without regulating it as an advisory service; to allow brokers to hold themselves out to the public as advisers, using titles like financial consultant and financial adviser for their salespeople, without regulating them as advisers; and to allow brokers to market their services based on the advice offered, without concluding either that advice was more than a “solely incidental” component of those services or that the advertisements were misleading.

Whether today’s Commission action has its desired effect will depend on how strictly it limits the advisory activities brokers are permitted to offer outside the protections of the Advisers Act. That is still very much open to question. We look forward to working with the Commission to develop a standard that draws a clear line between sales and advisory services. Meanwhile, the Commission is to be congratulated for taking this essential and long overdue first step toward restoring fairness and simple common sense to the regulation of financial professionals.