In theory, financial professionals are relatively distinct: A broker conducts transactions in securities on behalf of others; a dealer buys and sells securities for his or her own accounts; and an investment adviser provides advice to others regarding securities. Broker-dealers and investment advisers are subject to different regulatory structures. But trends in the financial services market since the early 1990s have blurred the boundaries between them. Regulatory reform requires a clearer understanding of the industry's complexities. The U.S. Securities and Exchange Commission asked RAND to conduct this study to examine the professionals' current business practices and whether investors understand differences between and relationships among them. The report describes a heterogeneous industry, with firms taking many different forms and offering a multitude of services and products and with investors failing to distinguish broker-dealers and investment advisers along regulatory lines. Despite this, investors express high levels of satisfaction with the services they receive from their own financial service providers. This satisfaction was much more frequently reported to arise from the personal attention the investor receives than from the actual financial returns arising from this relationship.

In theory, financial professionals are relatively distinct: A broker-dealer conducts transactions in securities on behalf of itself and others; and an investment adviser provides advice to others regarding securities. Different laws regulate each type of professional, but boundaries have blurred. This report examines current business practices and investor understanding of each type.

Congress' passage of the Wall Street Reform and Consumer Protection Act was, among other things, supposed to be an effort to reform the financial services regulatory structure, including that of the investment adviser industry. However, by preserving the SEC's status as sole regulator of investment advisers, the Act fails to adequately address the importance of investor confidence and instead threatens to preserve the status quo in an industry that has time and again betrayed investors. The SEC's recent missteps in the midst of the financial crisis necessitate organizational change in the regulation of investment advisers. Just as the SEC was born out of the market crash of 1929, this crisis of confidence calls for a response that actively culls a perception of a trustworthy and accountable infrastructure. By examining the role of trust in economic activity, the critical impact of self-regulatory organizations on investors' trust in the securities industry becomes apparent: FINRA's oversight authority must be extended to encompass the investment adviser industry so as to restore trust in the securities regulatory infrastructure, lest investors fail to regain the confidence needed for long-term financial recovery.