What your broker can't say -- but might anyway

By SmartMoney

If you walk into a brokerage and ask for financial advice, chances are the staff will offer to help with anything that's on your mind. But that doesn't mean that they're qualified to help -- or that they're particularly good at it.

As SmartMoney recently discovered, much of the advice that brokers give to would-be clients is off the mark. And according to some critics, some of their offers even violate U.S. Securities and Exchange Commission rules.

With plenty of boomers seeking more advice as they careen toward retirement, full-service brokerage firms are attracting new money from investors at a brisk pace, and many brokers now label themselves financial advisers.

Still, one important difference separates brokers from many of their competitors: Registered investment advisers and some financial planners are required to be fiduciaries -- that is, to act in their clients' best financial interest. But brokers have no such duty.

Because of that distinction, some consumer advocates argue that brokers shouldn't be allowed to offer broader financial-planning services. Indeed, an SEC rule issued in 2005 -- known as Rule 202 -- requires brokers to let clients know that they aren't fiduciaries. It also says that in most cases, brokers can't sell soup-to-nuts financial plans or present themselves to clients as financial planners.

Where does that leave investors, besides confused? To find out, SmartMoney conducted an informal survey. Our reporter introduced herself as a prospective client, visiting eight brokerages that were within walking distance of our Manhattan office or a short drive from her New Jersey home. She presented herself as a divorcée who had received a legal settlement and needed advice about investing, tax and estate planning, college savings, retirement and insurance (all true, by the way). She left out only that she would be writing about the experience. Of course, the field test was hardly scientific. But we found out that in their new roles, many brokers seemed just as confused as their customers. The good news: We picked up a lot of attractive graphs and pie charts, and a couple of weeks' worth of free coffee.

• Video: How to select a discount broker

Some of the reporter's findings:

College savings

My twin sons are less than two years away from attending college. That means they aren't great candidates for a 529 college-savings plan because they don't have much time to take advantage of the plan's tax-free earnings. But brokerages can collect hefty commissions by enrolling clients in such plans. So -- surprise -- they often advised me to join up. They also steered me to state-sponsored plans with which they had special fee arrangements, even when another state's plan was the better deal for me.

Got it right: Bank of America, Dreyfus, Morgan Stanley, Wachovia.

Missed the mark: Merrill Lynch, Northwestern Mutual, Smith Barney.

Life insurance

Because of other arrangements I've made, I don't need life insurance to protect my family. But many brokers didn't do the due diligence to figure this out, insisting that I needed more coverage. It's probably just a coincidence that insurance is a big commission generator.

Got it right: Northwestern Mutual, Wachovia.

Missed the mark: Bank of America, Merrill Lynch, Smith Barney.

Financial planning

According to some interpretations, a broker isn't supposed to offer a comprehensive financial plan unless he or she has additional credentials. Some brokerages disagree. In practice, however, they act as though they're carefully sidestepping the rules. A frequent refrain: "This is identical to the help you'd get from a financial planner." Legit or not, I was skeptical.

Got it right: Dreyfus, Morgan Stanley, Northwestern Mutual.

Missed the mark: Bank of America, Charles Schwab, Merrill Lynch, Smith Barney, Wachovia.

Are you a fiduciary?

It's an important question. A fiduciary has to put his client's financial interests above his own and his firm's. But every broker but one either botched the answer or gave me a blank look. The exception: A broker at Dreyfus, when asked whether he would be my fiduciary, answered, "No, but I play one on TV."

When I tallied the results, one thing was clear: The advice I'd received had ranged all over the map.

Smith Barney thought I should have 95% of my assets in equity-only mutual funds. Merrill Lynch advocated 56%. The annual fees ranged from 0.5% of my assets at Charles Schwab up to 2.25% at Morgan Stanley, and that didn't include the sales loads on some of the products they recommended. Meanwhile, the best advice I got came from a broker who had the added training of a registered investment adviser -- and happened to be a total jerk. One thing's certain: Given the current state of affairs, consumers will continue to have a hard time figuring out who's qualified to help.

This article was reported and written by Dyan Machan for SmartMoney, with additional reporting by Megan Barnett.