Investment Advisor status intentionally confusing

By DAVID MOON, Moon Capital Management
October 9, 2005

A little over ten years ago, I had lunch with David Martin, founder and president of Martin & Co., the area's largest registered investment advisory firm. I wanted to inform him that I was about to start my own firm. It seemed the professional and gentlemanly thing to do. I doubt he felt terribly threatened. I was barely 30 years old and had more chutzpah than assets.

David's most memorable comment from our visit was that he welcomed a new firm in the marketplace: it would help educate people about registered investment advisers and how these firms differ from other participants in the financial services field.

We still have a long way to go.

Although he's since sold the firm to First Tennessee Bank, Martin still runs the largest registered investment advisory firm in Knoxville. Moon Capital Management is the second largest, more than twice the size of the next firm. But you would never have been able to tell that from last Sunday's News Sentinel list of the area's largest registered investment advisory firms. The list's five largest local registered investment advisory firms aren't registered investment advisers at all. They are owned by holding companies that also happen to own registered investment advisory subsidiaries in other cities.

By the same token, Gannett owns both WBIR-TV and USA Today. Would you put Knoxville's NBC affiliate on a list of newspaper publishing companies?

The confusion is common - because it's encouraged by many participants in the financial services industry. A lot of companies in the money business operate on multiple sides of the industry. When someone is on both sides of a transaction, they are inherently in a position of conflict. For that system to work, however, the customers of each subsidiary business must feel as if they are receiving advice unbiased by the fundamental conflicts of the selling process.

Brokerage firms, like those listed in last week's list, aren't legally in the investment advice business. As a result of a ruling by the Securities and Exchange Commission last April 2, any advice offered by a stockbroker is considered incidental to the process of selling an investment, much like the advice you receive from any salesman. The large firms spent significant amounts of money lobbying for this ruling, so they wouldn't have to register their local offices as investment advisers with the SEC.

Confused? That's no great sin or cause for embarrassment. While spending money to have their brokers declared financial non-advisers by the SEC, the same firms were spending millions on advertising touting the personal financial advice offered by these non-advisers. Despite ads about planning for your daughter's wedding or buying that home on the beach, your broker has no legal fiduciary responsibility to his clients, nor is he required to disclose all potential conflicts of interest, sources of income, and complete disciplinary history. Registered investment advisers are required to do all of these.

If you're not sure whether someone offering you investment advice works for a registered investment advisory firm, ask to see the firm's disclosure document, Form ADV. The first part of the form can be found at, under the section 'Check Out Brokers & Advisers.'

An employee of a registered investment advisory firm is required to provide you with a copy of Part II of Form ADV before offering you any advice. This part of the disclosure document will include specific information about the individual with whom you are about to work. Without this disclosure, you are not working with a Securities and Exchange Commission-registered investment adviser ' or at least you're not working with one in compliance with the law.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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