Stockbroker or Financial Advisor?

by Fern on October 5, 2004

What’s the difference between a stockbroker and a financial advisor? Most people don’t know. Let me fill you in, but first a little background.
I got my start in the financial services field in 1981 at Waddell and Reed, an old line Kansas City firm that professed to do financial planning. It didn’t take me long to realize how slimy the brokerage industry was. There were about 160 of us hired as new trainees. About 86 passed the eight-month evening training sessions, which was a sales course. Fast-forward to more than 20 years later and there is less then 10 that I know of that are still practicing.
Back then Venita Van Caspel wrote the Money Dynamics, the first book about financial planning, and still a great primer for anyone interested in the topic. By 1989, Van Caspel got into trouble by selling limited partnerships that she owned interests in but did not disclose to clients. Note- everyone back then was selling limited partnerships, even moi. But not disclosing a conflict?!
When those Limited Partnerships went under, her clients sued. Van Caspel’s defense was that she was only acting as a stockbroker and under the broker’s exemption to the Investment Advisors Act of 1940, didn’t owe clients a duty to disclose her conflicts of interest. The courts agreed.
Now the FPA (Financial Planning Association) is filing a lawsuit to close the loophole that Van Caspel used. The Investment Advisors Act of 1940 requires a financial advisor to act as a fiduciary (meaning putting the client’s interest first) and to disclose any conflicts of interest. In 1999, the SEC proposed a rule that would exempt the fee-based brokerage programs from the fiduciary and disclosure standards of the Investment Advisor Act of 1940. This allowed brokers to start operating under the exemption immediately without waiting for a final rule. Since then stock brokers got to expand their wrap accounts and other fee-compensated programs without disclosing conflicts of interests to their clients. Now as the public clamors for more fairness, and more disclosure, real Financial Advisors have filed ADV Part II forms with the state or the SEC, have disclosed their compensation, their conflicts, and their fiduciary responsibility. Stockbrokers have hidden behind the broker’s exemption to the Investment Advisors Act of 1940. That is up until now. The FPA as well as NAPFA (National Association of Personal Financial Advisors) have joined together to force the SEC to take action to eliminate the broker’s exemption and its implications that brokers can act like they’re on the client’s side, but legally and actually represent their firm. The people who do understand this are going in droves to places like to seek out committed fee-only financial advisors and you should, too.

{ 5 comments… read them below or add one }

Roger Lindsey May 19, 2009 at 5:20 pm

I am interested in knowing where Venita lives.
I would like to get in touch with her.
She was a person who made a difference in my professional career and I want to thank her.
Roger Lindsey

Fern July 2, 2009 at 11:14 am

Sorry, Roger, I have no idea where she is

joe April 2, 2010 at 7:32 pm

My father was one of the ones that was financially ruined by Ms. Van Caspel’s “advice”. All of the limited partnerships went under (except one), and the tax implications and the losses in the limited parternships cost my father dearly. Roger, it is interesting how you’d like to thank her. After all that she did to my father and family (as well as the others who filed the lawsuit against her) by her “advice”, I can’t imagine anyone respecting her.

Fern April 9, 2010 at 4:00 pm

Sorry to hear that. Yes, she really got into those limited partnerships back in the day.

Dan Rosenthal June 15, 2011 at 9:54 am

I was one who read her book in the late 70′s and benefited greatly. I was not into limited partnerships and made my own investments using her book as a GUIDE!

I learned a long time ago that if something sounded too good to be true, as in the “benefits” of a limited partnership, it is. There are no free lunches and too many people ask for advise and then assume that they don’t have to think any more.

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