Consumer Finance: Regulatory Coverage Generally Exists for Financial Planners, but Consumer Protection Issues Remain
Published: 2011-01-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Consumers are increasingly turning for help to financial planners-- individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products, and managing tax and estate planning. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners. This report examines (1) how financial planners are regulated and overseen at the federal and state levels, (2) what is known about the effectiveness of this regulation, and (3) the advantages and disadvantages of alternative regulatory approaches. To address these objectives, GAO reviewed federal and state statutes and regulations, analyzed complaint and enforcement activity, and interviewed federal and state government entities and organizations representing financial planners, various other arms of the financial services industry, and consumers.
section_title: What GAO Found
paragraphs: There is no specific, direct regulation of "financial planners" per se at the federal or state level, but various laws and regulations apply to most of the services they provide. Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states, and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities. Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners. The regulatory structure applicable to financial planners covers the great majority of their services, but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain. First, consumers may be unclear about when a financial planner is required to serve the client's best interest, particularly when the same financial planner provides multiple services associated with different standards of care. SEC is studying these issues with regard to securities transactions, but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products. Second, financial planners can adopt numerous titles and designations, which vary greatly in the expertise or training that they signify, but consumers may not understand or be able to distinguish among them. SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed. Finally, the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints, examination results, and enforcement activities associated with financial planners specifically, and distinct from investment advisers as a whole. A regulatory system should have data to identify risks and problem areas, and given that financial planning is a growing industry that has raised certain consumer protection issues, regulators could benefit from better information on the extent of problems specifically involving financial planning services. A number of stakeholders have proposed different approaches to the regulation of financial planners, including (1) creation of a federally chartered board overseeing financial planners as a distinct profession; (2) augmenting oversight of investment advisers with a self-regulatory organization; (3) extending the fiduciary standard of care to more financial services professionals; and (4) specifying standards for financial planners and the designations that they use. While the views of stakeholder interests vary, a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities. Given available information, an additional layer of regulation specific to financial planners does not appear to be warranted at this time.
section_title: What GAO Recommends
paragraphs: GAO recommends that (1) NAIC assess consumers' understanding of the standards of care associated with the sale of insurance products, (2) SEC assess investors' understanding of financial planners' titles and designations, and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers. NAIC said it would consider GAO's recommendation and SEC provided no comments.

section_title: Letter
paragraphs: Consumers are increasingly turning for help to professionals who describe  themselves as financial planners for assistance with a broad range of  services, such as selecting the right balance of stocks and bonds for an  investment portfolio, choosing among insurance products, and tax and  estate planning. Although there is no statutory or single definition of  financial planning, it can be broadly defined as a systematic process that  individuals use to achieve their financial goals. Between 2000 and 2008, the  number of financial planners more than doubled and may continue to  climb as more individuals are asked to take responsibility for their  retirement savings and must choose among a growing array of investment  options.
Some financial planning organizations have raised concerns that no single  law governs providers of financial planning services, broadly describing  this situation as a regulatory gap. Concerns also exist that financial  planners may have an inherent conflict of interest in recommending  products they may stand to benefit from selling. In addition, some  consumer advocates believe consumers may be confused by the numerous  titles and designations that financial planners can use. This report  responds to a mandate included in Section 919C of the Dodd-Frank Wall  Street Reform and Consumer Protection Act (Dodd-Frank Act) that  directed GAO to conduct a study on the oversight and regulation of  financial planners. Our objectives are to address (1) how financial  planners are regulated and overseen at the federal and state levels, (2)  what is known about the effectiveness of regulation of financial planners  and what regulatory gaps or overlap may exist, and (3) alternative  approaches for the regulation of financial planners and the advantages and  disadvantages of these approaches.
To address these objectives, we reviewed federal and selected state  statutes and regulations applicable to financial planners. We also reviewed  regulations issued by the Securities and Exchange Commission (SEC) and  the Financial Industry Regulatory Authority (FINRA), and model laws  developed by the National Association of Insurance Commissioners  (NAIC) and by the North American Securities Administrators Association  (NASAA). In addition, we reviewed applicable securities and insurance  laws and regulations of five states—California, Illinois, North Carolina,  Pennsylvania, and Texas. We also interviewed representatives of, and  gathered documentation from, SEC, FINRA, the Federal Trade  Commission (FTC), NAIC, and organizations representing the interests of  consumers, financial planners, and various arms of the financial services  industry. In addition, we gathered information on complaints and  enforcement activity, as available, from SEC, FINRA, FTC, and selected  state regulators and organizations. A more extensive discussion of our  scope and methodology appears in appendix I.
We conducted this performance audit from June 2010 to January 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: Financial planning typically involves a variety of services, including  preparing financial plans for clients based on their financial circumstances  and objectives and making recommendations for specific actions clients  may take. In many cases, financial planners also help implement these  recommendations by, for example, providing insurance products,  securities, or other investments. Individuals who provide financial  planning services may call themselves a variety of different titles, such as  financial planner, financial consultant, financial adviser, trust advisor, or  wealth manager. In addition, many financial planners have privately  conferred professional designations or certifications, such as Certified  Financial Planner®, Chartered Financial Consultant®, or Personal Financial  Specialist.
The number of financial planners in the United States rose from  approximately 94,000 in 2000 to 208,400 in 2008, according to the Bureau  of Labor Statistics. The bureau projects the number will rise to 271,200 by  2018 because of the need for advisers to assist the millions of workers  expected to retire in the next 10 years. According to the bureau, 29  percent of financial planners are self-employed and the remaining 71  percent are employees of firms, some of them large entities with offices  nationwide that provide a variety of financial services. The median annual  wage for financial planners was $68,200 in May 2009.
According to an analysis of the 2007 Survey of Consumer Finances, the  most recent year for which survey results are available, in 2007 about 22  percent of U.S. households used a financial planner for investment and  saving decisions and about 12 percent of U.S. households used a financial  planner for making credit and borrowing decisions. Those households  most likely to use a financial planner were those with higher incomes. For  example, 37 percent of households in the top income quartile used a  financial planner to make investment and saving decisions compared to 10  percent of households in the bottom quartile.
section_title: Various Federal and State Laws and Regulations Apply to Financial Planners and Their Activities
paragraphs: Financial planners are primarily regulated by federal and state investment  adviser laws, because planners typically provide advice about securities as  part of their business. In addition, financial planners that sell securities or  insurance products are subject to applicable laws governing broker- dealers and insurance agents. Certain laws and regulations can also apply  to the use of the titles, designations, and marketing materials that financial  planners use.
subsections: section_title: Financial Planners Are Primarily Regulated by Federal and State Investment Adviser Laws
paragraphs: There is no specific, direct regulation of “financial planners” per se at the  federal or state level. However, the activities of financial planners are  primarily regulated under federal and state laws and regulations governing  investment advisers—that is, individuals or firms that provide investment  advice about securities for compensation. According to SEC staff,  financial planning normally includes making general or specific  recommendations about securities, insurance, savings, and anticipated  retirement. SEC has issued guidance that broadly interprets the  Investment Advisers Act of 1940 (Advisers Act) to apply to most financial  planners, because the advisory services they offer clients typically include  providing advice about securities for compensation. Similarly, NASAA  representatives told us that states take a similar approach on the  application of investment adviser laws to financial planners and, as a  result, generally register and oversee financial planners as investment  advisers. As investment advisers, financial planners are subject to a  fiduciary standard of care when they provide advisory services, so that the  planner “ held to the highest standards of conduct and must act in the  best interest of  clients.”
SEC and state securities departments share responsibility for the oversight  of investment advisers in accordance with the Advisers Act. Under that  act, SEC generally oversees investment adviser firms that manage $25  million or more in client assets, and the states that require registration  oversee those firms that manage less. However, as a result of section 410  of the Dodd-Frank Act, as of July 2011 the states generally will have  registration and oversight responsibilities for investment adviser firms that  manage less than $100 million in client assets, instead of firms that manage  less than $25 million in assets as under current law. This will result in the  states gaining responsibility for firms with assets under management  between $25 million and $100 million. As shown in figure 1, as of October  2010, of the approximately 16,000 investment adviser firms providing  financial planning services, the states were overseeing about 11,100 firms  and SEC was overseeing about 4,900 such firms.  However, in July 2011  about 2,400 of investment adviser firms that provided financial planning  services (15 percent of the 16,000 firms) may shift from SEC to state  oversight.
SEC’s supervision of investment adviser firms includes evaluating their  compliance with federal securities laws by conducting examinations of  firms—including reviewing disclosures made to customers—and  investigating and imposing sanctions for violations of securities laws.  According to SEC staff, in its examinations, the agency takes specific steps  to review the financial planning services of investment advisers. For  example, SEC may review a sample of financial plans that the firm  prepared for its customers to check whether the firm’s advice and  investment recommendations are consistent with customers’ goals, the  contract with the firm, and the firm’s disclosures.
However, the frequency with which SEC conducts these examinations  varies, largely because of resource constraints faced by the agency. SEC  staff told us that the agency examined only about 10 percent of the  investment advisers it supervises in 2009. In addition, they noted that  generally an investment adviser is examined, on average, every 12 to 15  years, although firms considered to be of higher risk are examined more  frequently. In 2007, we noted that harmful practices could go undetected  because investment adviser firms rated lower-risk are unlikely to undergo  routine examinations within a reasonable period of time, if at all.
According to NASAA, state oversight of investment adviser firms generally  includes activities similar to those undertaken by SEC, including taking  specific steps to review a firm’s financial planning services. According to  NASAA, states generally register not just investment adviser firms but also  investment adviser representatives—that is, individuals who provide  investment advice and work for a state- or federally registered investment  adviser firm.
section_title: Financial Planners Are Subject to Broker-Dealer and Insurance Laws When Acting in Those Capacities
paragraphs: In addition to providing advisory services, such as developing a financial  plan, financial planners generally help clients implement the plan by  making specific recommendations and by selling securities, insurance  products, and other investments. SEC data show that, as of October 2010,  19 percent of investment adviser firms that provided financial planning  services also provided brokerage services, and 27 percent provided  insurance.
Financial planners that provide brokerage services, such as buying or  selling stocks, bonds, or mutual fund shares, are subject to broker-dealer  regulation at the federal and state levels. At the federal level, SEC oversees  U.S. broker-dealers, and SEC’s oversight is supplemented by self- regulatory organizations (SRO). The primary SRO for broker-dealers is  FINRA. State securities offices work in conjunction with SEC and FINRA  to regulate securities firms. Salespersons working for broker-dealers are  subject to state registration requirements, including examinations. About  half of broker-dealers were examined in 2009 by SEC and SROs. Under  broker-dealer regulation, financial planners are held to a suitability  standard of care when making a recommendation to a client to buy or sell  a security, meaning that they must recommend those securities that they  reasonably believe are suitable for the customer.
Financial planners that sell insurance products, such as life insurance or  annuities, must be licensed by the states to sell these products and are  subject to state insurance regulation. In contrast to securities entities  (other than national banks) that are subject to dual federal and state  oversight, the states are generally responsible for regulating the business  of insurance. When acting as insurance agents, financial planners are  subject to state standard of care requirements, which can vary by product  and by state. As of October 2010, 32 states had adopted a previous version  of the NAIC Suitability in Annuities Transactions Model Regulation,  according to NAIC. In general, this regulation requires insurance agents  to appropriately address consumers’ insurance needs and financial  objectives at the time of an annuity transaction. Thirty-four states had  also adopted the Life Insurance Disclosure Model Regulation in a uniform  and substantially similar manner as of July 2010, according to NAIC. This  regulation does not include a suitability requirement, although it does  require insurers to provide customers with information that will improve  their ability to select the most appropriate life insurance plan for their  needs and improve their understanding of the policy’s basic features.
Financial planners that sell variable insurance products, such as variable  life insurance or variable annuities, are subject to both state insurance  regulation and broker-dealer regulation, because these products are  regulated as both securities and insurance products. When selling variable  insurance, financial planners are subject to FINRA sales practice  standards requiring that such sales be subject to suitability standards. In  addition, other FINRA rules and guidance, such as those governing  standards for communication with the public, apply to the sale of variable  insurance products. In addition, as previously discussed, 32 states also  generally require insurance agents and companies to appropriately  address a consumer’s insurance needs and financial objectives at the time  of an annuity transaction. However, in the past, we have reported that the  effectiveness of market conduct regulation—that is, examination of the  sales practices and behavior of insurers—may be limited by a lack of  reciprocity and uniformity, which may lead to uneven consumer  protection across states.
section_title: Federal and State Laws and Regulations Can Apply to the Use of Marketing Materials and Financial Planning Titles and Designations
paragraphs: At the federal level, SEC and FINRA have regulations on advertising and  standards of communication that apply to the strategies investment  adviser firms and broker-dealers use to market their financial planning  services. For example, SEC-registered investment advisers must follow  SEC regulations on advertising and other communications, which prohibit  false or misleading advertisements, and these regulations apply to  investment advisers’ marketing of financial planning services. FINRA  regulations on standards for communication with the public similarly  prohibit false, exaggerated, unwarranted, or misleading statements or  claims by broker-dealers, and broker-dealer advertisements are subject to  additional approval, filing, and recordkeeping requirements and review  procedures. According to many company officials we spoke with, their  companies responded to these requirements by putting procedures in  place to determine which designations and titles their registered  representatives may use in their marketing materials, such as business  cards.
SEC and state securities regulators also regulate information that  investment advisers are required to disclose to their clients. In the Uniform  Application for Investment Adviser Registration (Form ADV), regulators  have typically required investment adviser firms to provide new and  prospective clients with background information, such as the basis of the  advisory fees, types of services provided (such as financial planning  services), and strategies for addressing conflicts of interest that may arise  from their business activities. Recent changes to Form ADV are designed  to improve the disclosures that firms provide to clients. For example,  firms must now provide clients with information about the advisory  personnel on whom they rely for investment advice, including the  requirements and applicability of any professional designations or  certifications advisers may choose to include in their background  information.
Most states regulate the use of the title “financial planner,” and state  securities and insurance laws can apply to the misuse of this title and  other titles. For example, according to NASAA, at least 29 states  specifically include financial planners in their definition of investment  adviser. According to NAIC, in many states, regulators can use unfair  trade practice laws to prohibit insurance agents from holding themselves  out as financial planners when in fact they are only engaged in the sale of  life or annuity insurance products. However, as noted earlier, the  effectiveness of the regulation of insurers’ market conduct varies across  states. In particular, in 2010 we noted inconsistencies in the state  regulation of life settlements, a potentially high-risk transaction in which  financial planners may participate.
In addition, we were told some states had adopted regulations limiting the  use of “senior-specific designations”—that is, designations that imply  expertise or special training in advising senior citizen or elderly investors.  According to NAIC, as of December 2010, 25 states had adopted in a  uniform and substantially similar manner the NAIC Model Regulation on  the Use of Senior-Specific Certifications and Professional Designations in  the Sale of Life Insurance and Annuities, which limits the use of senior- specific designations by insurance agents. According to NASAA, as of  December 2010, 31 states had adopted—and at least 9 other states were  planning to adopt—the NASAA Model Rule on the Use of Senior-Specific  Certifications and Professional Designations, which prohibits the  misleading use of senior-specific designations by investment adviser  representatives and other financial professionals.
section_title: Regulatory Structure for Financial Planners Covers Most Activities, but Some Consumer Protection Issues Exist, and Data Tracking Complaints and Regulatory Actions against Planners Are Limited
paragraphs: The regulatory system for financial planners covers most activities in  which they engage. However, enforcement of regulation may be  inconsistent and some questions exist about consumers’ understanding of  the roles, standards of care, and titles and designations that a financial  planner may have. The ability of regulators to identify potential problems  is limited because they do not specifically track complaints, inspections,  and enforcement actions specific to financial planning services.
subsections: section_title: Existing Regulation Covers Most Financial Planning Services
paragraphs: Although there is no single stand-alone regulatory body with oversight of  financial planners, the regulatory structure for financial planners covers  most activities in which they engage. As discussed earlier, and summarized  in figure 2, the primary activities a financial planner performs are subject  to existing regulation at the federal or state level, primarily through  regulation pertaining to investment advisers, broker-dealers, and  insurance agents. As such, SEC, FINRA, and NASAA staff, a majority of  state securities regulators, financial industry representatives, consumer  groups, and academic and subject matter experts with whom we spoke  said that, in general, they believe the regulatory structure for financial  planners is comprehensive, although, as discussed below, the attention  paid to enforcing existing regulation has varied.
As noted earlier, the activities a financial planner normally engages in  generally include advice related to securities—and such activities make  financial planners subject to regulation under the Advisers Act. One  industry association and an academic expert noted that it would be very  difficult to provide financial planning services without offering investment  advice or considering securities. SEC staff told us that financial planners  holding even broad discussions of securities—for example, what  proportion of a portfolio should be invested in stocks—would be required  to register as investment advisers or investment adviser representatives. In  theory, a financial planner could offer only services that do not fall under  existing regulatory regimes—for example, advice on household  budgeting—but such an example is likely hypothetical and such a business  model may be hard to sustain. SEC and NASAA staff, a majority of the  state securities regulators we spoke with, and many representatives of the  financial services industry told us that they were not aware of any  individuals serving as financial planners who were not regulated as  investment advisers or regulated under another regulatory regime. Some  regulators and industry representatives also said that, to the extent that  financial planners offered services that did not fall under such regulation,  the new Bureau of Consumer Financial Protection potentially could have  jurisdiction over such services.
However, not everyone agreed that regulation of financial planners was  comprehensive. One group, the Financial Planning Coalition, has argued  that a regulatory gap exists because no single law governs the delivery of  the broad array of financial advice to the public. According to the  coalition, the provision of integrated financial advice—which would cover  topics such as selecting and managing investments, income taxes, saving  for college, home ownership, retirement, insurance, and estate planning— is unregulated. Instead, the coalition says that there is patchwork  regulation of financial planning advice, and it views having two sets of  laws—one regulating the provision of investment advice and another  regulating the sale of products—as problematic.
In addition, although the regulatory structure itself for financial planners  may generally be comprehensive, attention paid to enforcing existing  statute and regulation has varied. For example, as noted earlier, due to  resource constraints, the examination of SEC-supervised investment  advisers is infrequent. Further, as also noted earlier, market conduct  regulation of insurers—which would include the examination of the sales  practices and behavior of financial planners selling insurance products— has been inconsistent. Some representatives of industry associations told  us that they believed that a better alternative to additional regulation of  financial planners would be increased enforcement of existing law and  regulation, particularly related to fraud and unfair trade practices.
Certain professionals—including attorneys, certified public accountants,  broker-dealers, and teachers—who provide financial planning advice are  exempt from regulation under the Advisers Act if such advice is “solely  incidental” to their other business activities. According to an SEC staff  interpretation, this exemption would not apply to individuals who held  themselves out to the public as providing financial planning services, and  would apply only to individuals who provided specific investment advice  on anything other than “rare, isolated and non-periodic instances.” Banks  and bank employees are also excluded from the Advisers Act and are  subject to separate banking regulation. The American Bankers  Association told us that the financial planning activities of bank employees  such as trust advisors or wealth managers were typically utilized by clients  with more than $5 million in investable assets. The association noted that  these activities were subject to a fiduciary standard and the applicable  supervision of federal and state banking regulators.
Most regulators and academic experts and many financial services  industry representatives we spoke with told us that there is some overlap  in the regulation of individuals who serve as financial planners because  such individuals might be subject to oversight by different regulatory  bodies for the different services they provide. For example, a financial  planner who recommends and sells variable annuities as part of a financial  plan is regulated as a registered representative of a broker-dealer as well  as an insurance agent under applicable federal and state laws. However,  some state regulators we spoke with told us that such overlap may be  appropriate since the regulatory regimes cover different functional areas.
section_title: Consumers May Not Understand That Financial Planners Have Potential Conflicts of Interest When Selling Products
paragraphs: As seen in figure 3, financial planners are subject to different standards of  care in their capacities as investment advisers, broker-dealers, and  insurance agents.
Fiduciary Standard of Care: As noted earlier, investment advisers are  subject to a fiduciary standard of care—that is, they must act in their  client’s best interest, ensure that recommended investments are suitable  for the client, and disclose to the client any material conflicts of interest.  According to SEC and NASAA representatives, the fiduciary standard  applies even when investment advisers provide advice or  recommendations about products other than securities, such as insurance,  in conjunction with advice about securities.
Suitability Standard of Care When Recommending Security Products:  FINRA regulation requires broker-dealers to adhere to a suitability  standard when rendering investment recommendations—that is, they must  recommend only those securities that they reasonably believe are suitable  for the customer. Unlike the fiduciary standard, suitability rules do not  necessarily require that the client’s best interest be served. According to  FINRA staff, up-front general disclosure of a broker-dealer’s business  activities and relationships that may cause conflicts of interest is not  required. However, according to SEC, broker-dealers are subject to many  FINRA rules that require disclosure of conflicts in certain situations,  although SEC staff also note that those rules may not cover every possible  conflict of interest, and disclosure may occur after conflicted advice has  already been given.
Suitability Standard of Care When Recommending Insurance Products:  Standards of care for the recommendation and sale of insurance products  vary by product and by state. For example, as seen earlier, NAIC’s model  regulations on the suitability standard for annuity transactions, adopted by  some states but not others, require consideration of the insurance needs  and financial objectives of the customer, while NAIC’s model regulation  for life insurance does not include a suitability requirement per se.
Conflicts of interest can exist when, for example, a financial services  professional earns a commission on a product sold to a client. Under the  fiduciary standard applicable to investment advisers, financial planners  must mitigate any potential conflicts of interest and disclose any that  remain. But under a suitability standard applicable to broker-dealers,  conflicts of interest may exist and generally may not need to be disclosed  up-front. For example, as confirmed by FINRA, financial planners  functioning as broker-dealers may recommend a product that provides  them with a higher commission than a similar product with a lower  commission, as long as the product is suitable and the broker-dealer  complies with other requirements. Because the same individual or firm  can offer a variety of services to a client—a practice sometimes referred to  as “hat switching”—these services could be subject to different standards  of care. As such, representatives of consumer groups and others have  expressed concern that consumers may not fully understand which  standard of care, if any, applies to a financial professional. As shown  above, the standards of care—and the extent to which conflicts of interest  must be disclosed—can vary depending on the capacity in which the  individual serves. A 2007 report by the Financial Planning Association  stated that “it would be difficult, if not impossible, for an individual  investor to discern when the adviser was acting in a fiduciary capacity or  in a non-fiduciary capacity.” A 2008 SEC study conducted by the RAND  Corporation, consisting of a national household survey and six focus  group discussions with investors, found that consumers generally did not  understand not only the distinction between a suitability and fiduciary  standard of care but also the differences between broker-dealers and  investment advisers. Similarly, a 2010 national study of investors found  that most were confused about which financial professionals are required  to operate under a fiduciary standard that requires professionals to put  their client’s interest ahead of their own.
Representatives of financial services firms that provide financial planning  told us they believe that clients are sufficiently informed about the  differing roles and accompanying standards of care that a firm  representative may have. They noted that when they provide both advisory  and transactional services to the same customer, each service—such as  planning, brokerage, or insurance sales—is accompanied by a separate  contract or agreement with the customer. These agreements disclose that  the firm’s representatives have different obligations to the customer  depending on their role. In addition, once a financial plan has been  provided, some companies told us that they have customers sign an  additional agreement stating that the financial planning relationship with  the firm has ended.
Recent revisions by SEC to Form ADV disclosure requirements were  designed to address, among other things, consumer understanding of  potential conflicts of interest by investment advisers and their  representatives. Effective October 12, 2010, SEC revised Form ADV, Part  2, which financial service firms must provide to new and prospective  clients. The new form, which must be written in plain English, is  intended to help consumers better understand the activities and  affiliations of their investment adviser. It requires additional disclosures  about a firm’s conflicts of interest, compensation, business activities, and disciplinary information that is material to an evaluation of the adviser’s  integrity. Similarly, in October 2010 FINRA issued a regulatory notice  requesting comments on a concept proposal regarding possible new  disclosure requirements that would, among other things, detail for  consumers in plain English the conflicts of interest that broker-dealers  may have associated  with their services.
Section 913 of the Dodd-Frank Act requires SEC to study the substantive  differences between the applicable standards of care for broker-dealers  and investment advisers; the effectiveness of the existing legal or  regulatory standards of care for brokers, dealers, and investment advisers;  and consumers’ ability to understand the different standards of care. SEC  will also consider the potential impact on retail customers of imposing the  same fiduciary standard that now applies to investment advisers on  broker-dealers when they provide personalized investment advice. Under  the act, SEC may promulgate rules to address these issues and is  specifically authorized to establish a uniform fiduciary duty for broker- dealers and investment advisers that provide personalized investment  advice about securities to customers. As a result, further clarification of  these standards may be forthcoming. FINRA officials told us that they  support a fiduciary standard of care for broker-dealers when they provide  personalized investment advice to retail customers.
Consumer confusion on standards of care may also be a source of concern  with regard to the sale of some insurance products. A 2010 national survey  of investors found that 60 percent mistakenly believed that insurance  agents had a fiduciary duty to their clients. Some insurance products,  such as annuities, are complex and can be difficult to understand, and  annuity sales practices have drawn complaints from consumers and  various regulatory actions from state regulators as well as SEC and FINRA  for many years. According to NAIC, many states have requirements that  insurance salespersons sell annuities only if the product is suitable for the  customer. However, NAIC notes that some states do not have a suitability  requirement for annuities. Consumer groups and others have stated that  high sales commissions on certain insurance products, including annuities,  may provide salespersons with a substantial financial incentive to sell  these products, which may or may not be in the consumer’s best interest.  As a result of section 989J of the Dodd-Frank Act, one type of annuity—the  indexed annuity—is to be regulated by states as an insurance product,  rather than regulated by SEC as a security, under certain conditions.
SEC’s pending study related to the applicable standards of care for broker- dealers and investment advisers will not look at issues of insurance that  fall outside of SEC’s jurisdiction. NAIC has not undertaken a similar study  regarding consumer understanding of the standard of care for insurance  agents. As we reported in the past, financial markets function best when  consumers understand how financial service providers and products work  and know how to choose among them. Given the evidence of consumer  confusion about differing standards of care and given the increased risks  that certain insurance products can pose, there could be benefits to an  NAIC review of consumers’ understanding of standards of care for high- risk insurance products.
section_title: Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public
paragraphs: Individuals who provide financial planning services may use a variety of  titles when presenting themselves to the public, including financial  planner, financial consultant, and financial adviser, among many others.  However, evidence suggests that the different titles financial professionals  use can be confusing to consumers. The 2008 RAND study found that even  experienced investors were confused about the titles used by broker- dealers and investment advisers, including financial planner and financial  adviser. Similarly, in consumer focus groups of investors conducted by  SEC in 2005 as part of a rulemaking process, participants were generally  unclear about the distinctions among titles, including broker, investment  adviser, and financial planner. In addition, a representative of one  consumer advocacy group has expressed concern that some financial  professionals may use as a marketing tool titles suggesting that they  provide financial planning services, when in fact they are only selling  products. One industry group, the Financial Planning Coalition, also has  noted that some individuals may hold themselves out as financial planners  without meeting minimum training or ethical requirements. Federal and  state regulators told us they generally focused their oversight and  enforcement actions on financial planners’ activities rather than the titles  they use. Moreover, NASAA has said that no matter what title financial  planners use, most are required to register as investment adviser  representatives and must satisfy certain competency requirements,  including passing an examination or obtaining a recognized professional  designation.
Financial planners’ professional designations are typically conferred by a  professional or trade organization. These designations may indicate that a  planner has passed an examination, met certain educational requirements,  or had related professional experience. Some of these designations require  extensive classroom training and examination requirements and include  codes of ethics with the ability to remove the designation in the event of  violations. State securities regulators view five specific designations as  meeting or exceeding the registration requirements for investment adviser  representatives, according to NASAA, and allow these professional  designations to satisfy necessary competency requirements for  prospective investment adviser representatives. For example, one of  these five designations requires a bachelor’s degree from an accredited  college or university, 3 years of full-time personal financial planning  experience, a certification examination, and 30 hours of continuing  education every 2 years.
The criteria used by organizations that grant professional designations for  financial professionals vary greatly. FINRA has stated that while some  designations require formal certification procedures, including  examinations and continuing professional education credits, others may  merely signify that membership dues have been paid. The Financial  Planning Coalition and The American College, a nonprofit educational  institution that confers several financial designations, similarly told us that  privately conferred designations range from those with rigorous  competency, practice, and ethical standards and enforcement to those that  can be obtained with minimal effort and no ongoing evaluation.
As noted earlier, designations that imply expertise or special training in  advising senior citizen or elderly investors have received particular  attention from regulators. A joint report of SEC, FINRA, and NASAA  described cases in which financial professionals targeted seniors by using  senior-specific designations that implied that they had a particular  expertise for senior investors, when in fact they did not; as noted earlier,  NASAA and NAIC have developed a model rule to address the issue. The  report also noted these professionals targeted seniors through the use of  so-called free-lunch seminars, where free meals are offered in exchange  for attendance of a financial education seminar. However, the focus of the  seminars was actually on the sale of products rather than the provision of  financial advice.
Given the large number of designations financial planners may use,  concerns exist that consumers may have difficulty distinguishing among  them. To alleviate customer confusion, FINRA has developed a Web site  for consumers that provides the required qualifications and other  information about the designations used by securities professionals. The  site lists more than 100 professional designations, 5 of which include the  term “financial planner,” and 24 of which contain comparable terms such  as financial consultant or counselor. The American College told us that it  had identified 270 financial services designations. Officials from NASAA,  NAIC, and a consumer advocacy organization told us that consumers  might have difficulty distinguishing among the various designations.  Officials from The American College told us that the number of  designations itself was not necessarily a cause for concern, but rather  consumers’ broadly held misperception that all designations or credentials  are equal.
To help address these concerns, FINRA plans to expand its Web site on  professional designations to include several dozen additional designations  related to insurance. However, FINRA officials noted that consumers’ use  of this tool has been limited. For example, in 2009, the site received only  55,765 visits. A recent national study of the financial capability of  American adults sponsored by FINRA found that only 15 percent of adults  who had used a financial professional in the last 5 years claimed to have  checked the background, registration, or license of a financial  professional. In addition, SEC staff acknowledged that there have been  concerns about confusing designations, and SEC’s October 2010 changes  to investment adviser disclosure requirements mandate that investment  adviser representatives who list professional designations and  certifications in their background information also provide the  qualifications needed for these designations, so that the consumer can  understand the value of the designation for the services being provided.
Section 917 of the Dodd-Frank Act includes a requirement that SEC  conduct a study identifying the existing level of financial literacy among  retail investors, including the most useful and understandable relevant  information that they need to make informed financial decisions before  engaging a financial intermediary. While the section does not specifically  mention the issue of financial planners’ titles and designations, the  confusion we found to exist could potentially be addressed or mitigated if  SEC incorporated this issue into its overall review of financial literacy  among investors. SEC staff told us that at this time its review would not  likely address this issue, although it would address such things as the need  for conducting background checks on financial professionals. Financial  markets function best when consumers have information sufficient to  understand and assess financial service providers and products.  Including financial planners’ use of titles and designations in SEC’s  financial literacy review could provide useful information on the  implications of consumers’ confusion on this issue.
section_title: Consumer Complaints and Enforcements Actions Appear to Be Relatively Limited, but Regulators Generally Do Not Track Data Specific to Financial Planners
paragraphs: Available data do not show a large number of consumer complaints and  enforcement actions involving financial planners, but the exact extent to  which financial planners may be a source of problems is unknown. We  were able to find limited information on consumer complaints from  various agencies. For example, representatives of FTC and the Better  Business Bureau said that they had received relatively few complaints  related to financial planners. FTC staff told us that a search in its  Consumer Sentinel Network database for the phrase “financial planner”  found 141 complaints in the 5-year period from 2005 through 2010 but that  only a handful of these appeared to actually involve activity connected to  the financial planning profession. The staff added that additional  searches on other titles possibly used by financial planners, such as  financial consultant and personal financial adviser, did not yield  significant additional complaints. In addition, a representative of the  Better Business Bureau told us that it had received relatively few  complaints related to financial planners, although the representative noted  that additional complaints might exist in broader categories, such as  “financial services.”
Consumer complaint data may not be an accurate gauge of the extent of  problems. Complaints may represent only a small portion of potential  problems and complaints related to “financial planners” may not always be  recorded as such. As we have previously reported, consumers also may  not always know where they can report complaints. At the same time,  some complaints that are made may not always be valid.
SEC has limited information on the extent to which the activities of  financial planners may be causing consumers harm. The agency does  record and track whether federally and state-registered investment adviser  firms provide financial planning services, but its data tracking systems for  complaints, examination results, and enforcement actions are not  programmed to readily determine and track whether the complaint, result,  or action was specifically related to a financial planner or financial  planning service. For example, SEC staff told us the number of complaints  about financial planners would be undercounted in their data system that  receives and tracks public inquiries, known as the Investor Response  Information System, because this code would likely be used only if it could  not be identified whether the person (or firm) was an investment adviser  or broker-dealer. In addition, the data system that SEC uses to record  examination results, known as the Super Tracking and Reporting System,  does not allow the agency to identify and extract examination results  specific to the financial planning services of investment advisers.
However, SEC staff told us that a review of its Investor Response  Information System identified 51 complaints or inquiries that had been  recorded using their code for issues related to “financial planners”  between November 2009 and October 2010. SEC staff told us that the  complaints most often involved allegations of unsuitable investments or  fraud, such as misappropriation of funds. A review of a separate SEC  database called Tips, Complaints, and Referrals—an interim system that  was implemented in March 2010—found 124 allegations of problems  possibly related to financial planners from March 2010 to October 2010.
SEC staff told us that they did not have comprehensive data on the extent  of enforcement activities related to financial planners per se. In addition,  NASAA said that states generally do not track enforcement data specific to  financial planners. At our request, SEC and NASAA provided us with  examples of enforcement actions related to individuals who held  themselves out as financial planners. Using a keyword search, SEC  identified 10 such formal enforcement actions between August 2009 and  August 2010. According to SEC documents, these cases involved  allegations of such activities as defrauding clients through marketing  schemes, receiving kickbacks without making proper disclosures, and  misappropriation of client funds. Although NASAA also did not have  comprehensive data on enforcement activities involving financial  planners, representatives provided us with examples of 36 actions brought  by 30 states from 1986 to 2010. These cases involved allegations of such  things as the sale of unsuitable products, fraudulent misrepresentation of  qualifications, failure to register as an investment adviser, and misuse of  client funds for personal expenses.
Because of limitations in how data are gathered and tracked, SEC and  state securities regulators are not currently able to readily determine the  extent to which financial planning services may be causing consumers  harm. NASAA officials told us that, as with SEC, state securities regulators  did not typically or routinely track potential problems specific to financial  planners. SEC and NASAA representatives told us that they had been  meeting periodically in recent months to prepare for the transition from  federal to state oversight of certain additional investment adviser firms, as  mandated under the Dodd-Frank Act, but they said that oversight of  financial planners in particular had not been part of these discussions.  SEC staff have noted that additional tracking could consume staff time  and other resources. They also said that because there are no laws that  directly require registration, recordkeeping, and other responsibilities of  “financial planners” per se, tracking such findings relating to those entities  would require expenditure of resources on something that SEC does not  have direct responsibility to oversee. Yet as we have reported in the past,  while we recognize the need to balance the cost of data collection efforts  against the usefulness of the data, a regulatory system should have data  sufficient to identify risks and problem areas and support  decisionmaking. Given the significant growth in the financial planning  industry, ongoing concerns about potential conflicts of interest, and  consumer confusion about standards of care, regulators may benefit from  identifying ways to get better information on the extent of problems  specifically involving financial planners and financial planning services.
section_title: Some Changes in the Oversight of Financial Planners Could Be Beneficial, but Most Stakeholders Believe Substantial Overhaul Is Not Needed
subsections: section_title: Stakeholders Have Suggested a Variety of Approaches to the Regulation of Financial Planners
paragraphs: Over the past few years, a number of stakeholders—including consumer  groups, FINRA, and trade associations representing financial planners,  securities firms, and insurance firms—have proposed different approaches  to the regulation of financial planners. Following are four of the most  prominent approaches, each of which has both advantages and  disadvantages.
subsections: section_title: Creation of a Board to Oversee Financial Planners
paragraphs: In 2009, the Financial Planning Coalition—comprised of the Certified  Financial Planner Board of Standards, Financial Planning Association, and  the National Association of Personal Financial Advisors—proposed that  Congress establish a professional standards-setting oversight board for  financial planners. According to the coalition, its proposed legislation  would establish federal regulation of financial planners by allowing SEC to  recognize a financial planner oversight board that would set professional  standards for and oversee the activities of individual financial planners,  although not financial planning firms. For example, the board would have  the authority to establish baseline competency standards in the areas of  education, examination, and continuing education, and would be required  to establish ethical standards designed to prevent fraudulent and  manipulative acts and practices. It would also have the authority to require  registration or licensing of financial planners and to perform investigative  and disciplinary actions. Under the proposal, states would retain antifraud  authority over financial planners as well as full oversight for financial  planners’ investment advisory activity. However, states would not be  allowed to impose additional licensing or registration requirements for  financial planners or set separate standards of conduct. Supporters of a  new oversight board have noted that its structure and governance would  be analogous to the Public Company Accounting Oversight Board, a  private nonprofit organization subject to SEC oversight that in turn  oversees the audits of public companies that are subject to securities laws.
According to the Financial Planning Coalition, a potential advantage of  this approach is that it would treat financial planning as a distinct  profession and would regulate across the full spectrum of activities in  which financial planners may engage, including activities related to  investments, taxes, education, retirement planning, estate planning,  insurance, and household budgeting. Proponents argue that a financial  planning oversight board would also help ensure high standards and  consistent regulation for all financial planners by establishing common  standards for competency, professional practices, and ethics.
However, many securities regulators and financial services trade  associations with whom we spoke said that they believe such a board  would overlap with and in many ways duplicate existing state and federal  regulations, which already cover virtually all of the products and services  that a financial planner provides. Some added that the board would entail  unnecessary additional financial costs and administrative burdens for the  government and regulated entities. In addition, some opponents of this  approach question whether “financial planning” should be thought of as a  distinct profession that requires its own regulatory structure, noting that  financial planning is not easily defined and can span multiple professions,  including accounting, insurance, investment advice, and law. One  consumer group also noted that the regulation of individuals and  professions is typically a state rather than a federal responsibility. Finally,  we note that the analogy to the Public Company Accounting Oversight  Board may not be apt. That board was created in response to a crisis  involving high-profile bankruptcies and investor losses caused in part by  inadequacies among public accounting firms. In the case of financial  planners, there is limited evidence of an analogous crisis or, as noted  earlier, of severe harm to consumers.
section_title: Augmenting Oversight of Investment Advisers with an SRO
paragraphs: A number of proposals over the years have considered having FINRA or a  newly created SRO supplement SEC oversight of investment advisers.  These proposals date back to at least 1963, when an SEC study  recommended that all registered investment advisers be required to be a  member of an SRO. In 1986, the National Association of Securities  Dealers, a predecessor to FINRA, explored the feasibility of examining the  investment advisory activities of members who were also registered as  investment advisers. The House of Representatives passed a bill in 1993  that would have amended the Advisers Act to authorize the creation of an  “inspection only” SRO for investment advisers, although the bill did not  become law. In 2003, SEC requested comments on whether one or more  SROs should be established for investment advisers, citing, among other  reasons, concerns that the agency’s own resources were inadequate to  address the growing numbers of advisers. However, SEC did not take  further action. Section 914 of the Dodd-Frank Act required SEC to issue a  study in January 2011 on the extent to which one or more SROs for  investment advisers would improve the frequency of examinations of  investment advisers.
According to FINRA, the primary advantage of augmenting investment  adviser oversight with an SRO is that doing so would allow for more  frequent examinations, given the limited resources of states and SEC. The  Financial Services Institute, an advocacy organization for independent  broker-dealers and financial advisers, has stated that an industry-funded  SRO with the resources necessary to appropriately supervise and examine  all investment advisers would close the gap that exists between the  regulation of broker-dealers and investment advisers. FINRA said that it  finds this gap troubling given the overlap between the two groups  (approximately 88 percent of all registered advisory representatives are  also broker-dealer representatives). FINRA adds that any SRO should  operate subject to strong SEC oversight and that releasing SEC of some of  its responsibilities for investment advisers would free up SEC resources  for other regulatory activities.
However, NASAA, some state securities regulators, and one academic with  whom we spoke opposed adding an SRO component to the regulatory  authority of investment advisers. NASAA said it believed that investment  adviser regulation is a governmental function that should not be outsourced  to a private, third-party organization that lacks the objectivity,  independence, expertise, and experience of a government regulator.  Further, NASAA said it is concerned with the lack of transparency  associated with regulation by SROs because, unlike government regulators,  they are not subject to open records laws through which the investing  public can obtain information. Two public interest groups, including the  Consumer Federation of America, have asserted that one SRO—FINRA— has an “industry mindset” that has not always put consumer protection at  the forefront. In addition, the Investment Adviser Association and two other  organizations we interviewed have noted that funding an SRO and  complying with its rules can impose additional costs on a firm.
section_title: Extending Coverage of the Fiduciary Standard
paragraphs: Proposals have been made to extend coverage of the fiduciary standard of  care to all those who provide financial planning services. Some consumer  groups and others have stated that a fiduciary standard should apply to  anyone who provides personalized investment advice about securities to  retail customers, including insurance agents who recommend securities.  The Financial Planning Coalition has proposed that the fiduciary standard  apply to all those who hold themselves out as financial planners.  Proponents of extending the fiduciary standard of care, which also include  consumer groups and NASAA, generally maintain that consumers should  be able to expect that financial professionals they work with will act in  their best interests. They say that a fiduciary standard is more protective  of consumers’ interests than a suitability standard, which requires only  that a product be suitable for a consumer rather than in the consumer’s  best interest. In addition, the Financial Planning Coalition notes that  extending a fiduciary standard would somewhat reduce consumer  confusion about financial planners that are covered by the fiduciary  standard in some capacities (such as providing investment advice) but not  in others (such as selling a product).
However, some participants in the insurance and broker-dealer industries  have argued that a fiduciary standard of care is vague and undefined. They  say that replacing a suitability standard with a fiduciary standard could  actually weaken consumer protections since the suitability of a product is  easier to define and enforce. Opponents also have argued that complying with  a fiduciary standard would increase compliance costs that in turn would be  passed along to consumers or otherwise lead to fewer consumer choices.
section_title: Clarifying Financial Planners’ Credentials and Standards
paragraphs: The American College has proposed clarifying the credentials and  standards of financial professionals, including financial planners. In  particular, it has proposed creating a working group of existing academic  and practice experts to establish voluntary credentialing standards for  financial professionals. As noted previously, consumers may be unable to  distinguish among the various financial planning designations that exist  and may not understand the requirements that underpin them. Clarifying  the credentials and standards of financial professionals could conceivably  take the form of prohibiting the use of certain designations, as has been  done for senior-specific designations in some states, or establishing  minimum education, testing, or work experience requirements needed to  obtain a designation. The American College has stated that greater  oversight of such credentials and standards could provide a “seal of  approval” that would generally raise the quality and competence of  financial professionals, including financial planners, help consumers  distinguish among the various credentials, and help screen out less  qualified or reputable players.
However, the ultimate effectiveness of such an approach is not clear, since  the extent to which consumers take designations into account when  selecting or working with financial planners is unknown, as is the extent of  the harm caused by misleading designations. In addition, implementation  and ongoing monitoring of financial planners’ credentials and standards  could be challenging. Further, the issue of unclear designations has already  been addressed to some extent—for example, as noted earlier, some states  regulate the use of certain senior-specific designations and allow five  professional designations to satisfy necessary competency requirements for  prospective investment adviser representatives. State securities regulators  also have the authority to pursue the misleading use of credentials through  their existing antifraud authority.
section_title: Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners
paragraphs: In general, a majority of the regulatory agencies, consumer groups,  academics, trade associations, and individual financial services companies  with which we spoke did not favor substantial structural change in the  regulation of financial planners. In particular, few supported an additional  oversight body, which was generally seen as duplicative of existing  regulation. Some stakeholders in the securities and insurance industries  noted that given the dynamic financial regulatory environment under way  as a result of the Dodd-Frank Act—such as creation of a new Bureau of  Consumer Financial Protection—more time should pass before additional  regulatory changes related to financial planning services were considered.  Several industry associations also noted that opportunities existed for  greater enforcement of existing law and regulation, as discussed earlier.
section_title: Conclusions
paragraphs: Existing statutes and regulations appear to cover the great majority of  financial planning services, and individual financial planners nearly always  fall under one or more regulatory regimes, depending on their activities.  While no single law governs the broad array of activities in which financial  planners may engage, given available information, it does not appear that an  additional layer of regulation specific to financial planners is warranted at  this time. At the same time, as we have previously reported, more robust  enforcement of existing laws could strengthen oversight efforts. In addition,  there are some actions that can be taken that may help address consumer  protection issues associated with the oversight of financial planners.
First, as we have reported, financial markets function best when  consumers understand how financial providers and products work and  know how to choose among them. Yet consumers may be unclear about  standards of care that apply to financial professionals, particularly when  the same individual or firm offers multiple services that have differing  standards of care. As such, consumers may not always know whether and  when a financial planner is required to serve their best interest. While SEC  is currently addressing the issue of whether the fiduciary standard of care  should be extended to broker-dealers when they provide personalized  investment advice about securities, the agency is not addressing whether  this extension should also apply to insurance agents, who generally fall  outside of SEC’s jurisdiction. Sales practices involving some high-risk  insurance products, such as annuities, have drawn attention from federal  and state regulators. A review by NAIC of consumers’ understanding of the  standards of care with regard to the sale of insurance products could  provide information on the extent of consumer confusion in the area and  actions needed to address the issue.
Second, we have seen that financial planners can adopt a variety of titles  and designations. The different designations can imply different types of  qualifications, but consumers may not understand or distinguish among  these designations, and thus may be unable to properly assess the  qualifications and expertise of financial planners. SEC’s recent changes in  this area—requiring investment advisers to disclose additional information  on professional designations and certifications they list—should prove  beneficial. Another opportunity lies in SEC’s mandated review of financial  literacy among investors. Incorporating issues of consumer confusion  about financial planners’ titles and designations into that review could  assist the agency in assessing whether any further changes are needed in  disclosure requirements or other related areas.
Finally, SEC has limited information about the nature and extent of  problems specifically related to financial planners because it does not track  complaints, examination results, and enforcement activities associated with  financial planners specifically, and distinct from investment advisers as a  whole. However, a regulatory system should have data sufficient to identify  risks and problem areas and support decisionmaking. SEC staff have noted  that additional tracking could require additional resources, but other  opportunities may also exist to gather additional information on financial  planners. Because financial planning is a growing industry and has raised  certain consumer protection issues, regulators could potentially benefit  from better information on the extent of problems specifically involving  financial planners and financial planning services.
section_title: Recommendations
paragraphs: We recommend that the National Association of Insurance  Commissioners, in concert with state insurance regulators, take steps to  assess consumers’ understanding of the standards of care with regard to  the sale of insurance products, such as annuities, and take actions as  appropriate to address problems revealed in this assessment.
We also recommend that the Chairman of the Securities and Exchange  Commission direct the Office of Investor Education and Advocacy, Office  of Compliance Inspections and Examinations, Division of Enforcement,  and other offices, as appropriate, to:  Incorporate into SEC’s ongoing review of financial literacy among  investors an assessment of the extent to which investors understand the  titles and designations used by financial planners and any implications a  lack of understanding may have for consumers’ investment decisions; and    Collaborate with state securities regulators in identifying methods to  better understand the extent of problems specifically involving financial  planners and financial planning services, and take actions to address any  problems that are identified.
section_title: Agency Comments
paragraphs: We provided a draft of this report for review and comment to FINRA,  NAIC, NASAA, and SEC. These organizations provided technical  comments, which we incorporated, as appropriate. In addition, NAIC  provided a written response, which is reprinted in appendix II. NAIC said  it generally agreed with the contents of the draft report and would give  consideration to our recommendation regarding consumers’  understanding of the standards of care with regard to the sale of insurance  products.
NASAA also provided a written response, which is reprinted in appendix  III. In its response, NASAA said it agreed that a specific layer of regulation  for financial planners was unnecessary and provided additional  information on some aspects of state oversight of investment advisers.  NASAA also said that it welcomed the opportunity to continue to  collaborate with SEC to identify methods to better understand and  address problems specifically involving financial planners, as we  recommended. In addition, NASAA expanded upon the reasons for its  opposition to proposals that would augment oversight of investment  advisers with an SRO.
We are sending copies of this report to interested congressional  committees, the Chief Executive Officer of FINRA, Chief Executive Officer  of NAIC, Executive Director of NASAA, and the Chairman of SEC.  In  addition, the report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs are on the last page of this  report. GAO staff who made major contributions to this report are listed in  appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: Our reporting objectives were to address (1) how financial planners are  regulated and overseen at the federal and state levels, (2) what is known  about the effectiveness of regulation of financial planners and what  regulatory gaps or overlap may exist, and (3) alternative approaches for  the regulation of financial planners and the advantages and disadvantages  of these approaches.
For background information, we obtained estimates for 2000 and 2008,  and projections for 2018, from the Bureau of Labor Statistics on the  number of individuals who reported themselves as “personal financial  advisers,” a term that the agency said was interchangeable with “financial  planner.” The bureau derived these estimates from the Occupational  Employment Statistics survey and the Current Population Survey.  According to the bureau, the Occupational Employment Statistics’  estimates for financial planners have a relative standard error of 1.9  percent, and the median wage estimate for May 2009 has a relative  standard error of 1.5 percent. Because the overall employment estimates  used are developed from multiple surveys, it was not feasible for the  bureau to provide the relative standard errors for these financial planner  employment statistics. To estimate the number of households that used  financial planners, we analyzed 2007 data from the Board of Governors of  the Federal Reserve’s Survey of Consumer Finances. This survey is  conducted every three years to provide detailed information on the  finances of U.S. households. Because the survey is a probability sample  based on random selections, the sample is only one of a large number of  samples that might have been drawn. Since each sample could have  provided different estimates, we express our confidence in the precision  of our particular sample’s results as a 95 percent confidence interval (e.g.,  plus or minus 2.5 percentage points). This is the interval that would  contain the actual population value for 95 percent of the samples that  could have been drawn. In this report, for this survey, all percentage  estimates have 95 percent confidence intervals that are within plus or  minus 2.5 percentage points from the estimate itself.
To identify how financial planners are regulated and overseen at the  federal and state levels, we identified and reviewed, on the federal level,  federal laws, regulations, and guidance applicable to financial planners,  the activities in which they engage, and their marketing materials, titles,  and designations. We also reviewed relevant SEC interpretive releases,  such as IA Rel. No. 1092, Applicability of the Investment Advisers Act to  Financial Planners, Pension Consultants, and Other Persons Who  Provide Investment Advisory Services as a Component of Other  Financial Services. We also discussed the laws and regulations relevant to  financial planners in meetings with staff of the Securities and Exchange  Commission (SEC), Financial Industry Regulatory Authority (FINRA),  Department of Labor, and Internal Revenue Service. We also interviewed  two legal experts and reviewed a legal compendium on the regulation of  financial planners. At the state level, we interviewed representatives from  the North American Securities Administrators Association (NASAA) and  the National Association of Insurance Commissioners (NAIC) and  reviewed model regulations developed by these agencies. In addition, we  selected five states—California, Illinois, North Carolina, Pennsylvania, and  Texas—for a more detailed review. We chose these states because they  had a large number of registered investment advisers and varying  approaches to the regulation of financial planners, and represented  geographic diversity. For each of these states, we reviewed selected laws  and regulations related to financial planners, which included those related  to senior-specific designations and insurance transactions, and we  interviewed staff at each state’s securities and insurance agencies.
To identify what is known about the effectiveness of the regulation of  financial planners and what regulatory gaps or overlap may exist, we  reviewed relevant federal and state laws, regulations and guidance. In  addition, we spoke with representatives of the federal and state agencies  cited above, as well as FINRA and organizations that represent or train  financial planners, including the Financial Planning Coalition, The  American College, and the CFA Institute; organizations that represent the  financial services industry, including the Financial Services Institute,  Financial Services Roundtable, Securities Industry and Financial Markets  Association, Investment Advisers Association, American Society of  Pension & Professional Actuaries, National Association of Insurance and  Financial Advisors, American Council of Life Insurers, Association for  Advanced Life Underwriting, American Institute of Certified Public  Accountants, American Bankers Association; and organizations  representing consumer interests, including the Consumer Federation of  America and AARP. We also spoke with selected academic experts  knowledgeable about these issues. In addition, we reviewed relevant  studies and other documentary evidence, including a 2008 study of the  RAND Corporation that was commissioned by SEC, “Investor and Industry  Perspectives on Investment Advisers and Broker-Dealers”; “Results of  Investor Focus Group Interviews About Proposed Brokerage Account  Disclosures,” sponsored by SEC; results of the FPA Fiduciary Task Force,  “Final Report on Financial Planner Standards of Conduct”; “U.S. Investors  & The Fiduciary Standard: A National Opinion Survey,” sponsored by  AARP, the Consumer Federation of America, the NASAA, the Investment  Adviser Association, the Certified Financial Planner Board of Standards,  the Financial Planning Association, and the National Association of  Personal Financial Advisors; and the 2009 National Financial Capability  Study, commissioned by FINRA. We determined that the reliability of  these studies was sufficient for our purposes. In addition, we reviewed  relevant information on the titles and designations used by financial  planners, including FINRA’s Web site that provides the required  qualifications and other information about the designations used by  securities professionals.
We also obtained and reviewed available data on complaints and selected  enforcement actions related to financial planners from the Federal Trade  Commission, Better Business Bureau, and SEC. We collected from the  Federal Trade Commission complaint data from its Consumer Sentinel  Network database, using a keyword search of the term “financial planner”  for complaints filed from 2005 to 2010. From the Better Business Bureau,  we collected the number of complaints about the financial planning  industry received in 2009. From SEC, we collected complaints from the  agency’s Investor Response Information System that had been coded as  relating to “financial planners” from November 2009 to October 2010. We  also reviewed data from SEC’s Tips, Complaints, and Referrals database  that resulted from a keyword search for the terms “financial planner,”  “financial adviser,” “financial advisor,” “financial consultant,” and  “financial counselor” from March 2010 to October 2010. In addition, at our  request, SEC and NASAA provided us anecdotally with examples of  enforcement actions related to individuals who held themselves out as  financial planners. SEC identified 10 formal enforcement actions between  August 2009 and August 2010 and NASAA provided us selected examples  of state enforcement actions involving financial planners from 1986 to  2010 from 30 states. We gathered information on SEC- and state-registered  investment advisers from SEC’s Investment Adviser Registration Database.  FINRA did not provide us with data on complaints, examination results, or  enforcement actions specific to financial planners; FINRA officials told us  they do not track these data specific to financial planners.
To identify alternative approaches for the regulation of financial planners  and their advantages and disadvantages, we conducted a search for  legislative and regulatory proposals related to financial planners, which  have been made by Members of Congress, consumer groups, and  representatives of the financial planning, securities, and insurance  industries. We identified and reviewed position papers, studies, public  comment letters, congressional testimonies, and other documentary  sources that address the advantages and disadvantages of these  approaches. In addition, we solicited views on these approaches from  representatives of the wide range of organizations listed above, including  organizations that represent financial planners, financial services  companies, and consumers, as well as state and federal government  agencies and associations and selected academic experts.
We conducted this performance audit from June 2010 through January  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the National Association of Insurance Commissioners
section_title: Appendix III: Comments from the North American Securities Administrators Association
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jason Bromberg (Assistant  Director), Sonja J. Bensen, Jessica Bull, Emily Chalmers, Patrick Dynes,  Ronald Ito, Sarah Kaczmarek, Marc Molino, Linda Rego, and Andrew  Stavisky made key contributions to this report.