Managing Partner of Chapwood Investments Management, Ed Butowsky, joins Gerri Willis on Fox Business’s The Willis Report to discuss the SEC’s new tougher rules for stockbrokers and how they affect you the investor.
The SEC on Thursday, January 21, 2011, released word that it has proposed tougher rules for how stockbrokers sell investments to clients. If these are adopted, it would make it easier for clients to sue their stockbrokers when investments go bad, but the rules do not cover all investments just “personal investment advise”. These new rules could affect over 600,000 stockbrokers.
To understand the impact of these rules and regulations investors/clients of stockbrokers need to understand the difference between working with a stockbroker and working with an investment advisor. A stockbroker’s standard is to determine if a specific investment is suitable for their specific client, whereas an investment advisor’s standard is to look at an investment in the context of the clients entire portfolio and determine if this investment fits in line with the portfolios big picture. Ed explains that for the last 30 years stockbrokers have been selling investments to their clients without regards to the overall structure of the portfolio. The SEC new rules could change these types of activities, as well as how stockbrokers are evaluated and judged.
Many of the stockbrokers could be doing a better job, however many more could benefit from better training. Ed points out from his many years in the industry and his years of service at a very large investment house, many stockbrokers in similar firms and elsewhere have not been properly trained in how to construct a proper portfolio and further how to evaluate that portfolio in terms of risk. It’s unfortunate because many clients do not know if they are dealing with a stockbroker or an investment advisor; they are just entrusting these people to manage their money and they are really looking at these people to guide them for the overall structure of their portfolio.
Stockbrokers have often been the subject of criticism because they tend to push what their investment banking unit or trading desk wants them to sell and at the end of the day these types of investments are not always in the best interest of the client. Should clients simply avoid working with stockbrokers? Clients should look for someone who is not only a stockbroker but also a investment advisor – a hybrid.
Stockbrokers, at times, tend to be viewed internally to their investment houses as a distribution channel for products that may not make sense to clients portfolio. Should these rules apply to all type of investments by stockbrokers? Clients must remember that stockbrokers are not selling just stocks, they are selling various financial notes and other products. Ed points out that during the liquidity crisis many of the firms were creating fixed income vehicles that were being sold at the wrong time and to the wrong people, but this is an instance where the distribution channel of stockbrokers in these big firms were used to sell improper investments. Not every big firm or investment house is making bad products or recommendations relative to the client’s portfolio; however clients need to be aware of them. One such investment in the laundry list of questionable investments is when firms put annuities within IRAs.
Overall, these discussions and rules from the SEC will be help the clients and moreover the industry moving forward.
Ed Butowsky is the managing partner of Chapwood Investment Management and is an internationally recognized expert in the investment wealth management industry. Ed is also a frequent guest on other networks such as CNN, NBC, ABC, Fox News, Fox Business, and Bloomberg to name a few.
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