By DAVID MOON, Moon Capital
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
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
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 www.sec.gov,
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).