There is widespread confusion in the investment marketplace today over who actually sells investments and who provides investment advice. Traditionally, a broker earned commissions by executing securities trades, and an investment advisor earned fees by providing investment advice. But over the last several years, an increasing number of brokers have begun to charge their clients a fee based on a percentage of assets, thereby mimicking the advisory model without the full panoply of disclosures that an advisor would otherwise provide. Obviously, if a client’s broker and advisor is the same person, there is at least the chance that the product sale might color the advice, or the advice might get in the way of the sale. As Eliot Spitzer recently remarked, “What used to be considered a conflict of interest became viewed as a synergy.”

How can an investor tell the difference between advice that is objective and advice that is tainted by a conflict of interest? The Investment Advisors Act of 1940 raised the bar for those who offer investment advice and established significantly higher fiduciary and disclosure standards than those mandated for the typical stockbroker. In brief, the 1940 act obligates a true provider of investment advice to place clients’ interests above his or her own and to disclose conflicts of interest before entering into a business relationship. The SEC is charged with enforcing this rule.