The SEC released the results of the RAND study today, which examined two issues: how broker/dealers and investment advisors market and provide products and services to investors, and how investors understand the differences between investment advisors and broker/dealers.

The RAND study paints a picture of today’s brokerage and investment advisory firms as shape-shifters, “taking many different forms, and offering a multitude of products and services,” leading to confusion among the retail investing public, especially when it comes to differences between the legal duties of investment advisors versus brokers. But there’s some good news in there for you, Mr. Advisor: Despite this confusion, the survey found investors expressed “high levels of satisfaction with the services they receive from their financial-service provider.” (Click here to access the release and the report.)

Duane Thompson, group director of advocacy for the FPA, says he commends the SEC and RAND for their thorough work, but he was “under-whelmed,” by the results of survey. Thompson says “the tricky part of this whole issue really isn’t addressed in the study itself because RAND wasn’t charged with making policy recommendations. The $64,000 question is: Whose set of rules should advisors and brokers operate under?” According to Thompson, the study basically states that advisors and brokers are doing the same thing, and investors really don’t understand the differences in the titles they use. “You can look at the cup as half empty or half full,” he continues. “Most investors say their happy with their advisor and that should come as no surprise. Most advisors are honest and do a good job, whether they’re affiliated with a broker or an investment advisor. But our concern is that you should play by the same rules if you’re doing the same thing.”

According to the RAND study, the financial-services industry is “very heterogeneous,” in terms of the size, services offered and activities of affiliated firms. Given this diversity, the study found that investors had difficulty distinguishing among industry professionals, especially with the introduction of fee-based brokerage programs. Interview participants on the industry side reported that investors rarely read the disclosures they are provided with. But investor participants in the study also struggled to understand the differences between the fiduciary and suitability standards of care even after the researchers had explained them to them.

“The broker/dealer community is already more heavily regulated and scrutinized than any of its peers or competitors—including financial planners,” says Ira Hammerman, senior managing director and general counsel of SIFMA in a statement responding to the release of the RAND study. “This robust regulatory regime, including oversight by FINRA, provides customers with clear disclosure and powerful protections,” he wrote. He also said that the industry “must recognize that some of the confusion appears related to the broad range of customer choice,” and that “any efforts to reduce confusion must ensure we don’t diminish customer choice.”

To get investor’s points of view, RAND surveyed 654 respondents nation-wide (both experienced and inexperienced investors) ,and held six intensive focus groups with 67 participants in Fort Wayne, Ind., and Alexandria, Va. To gauge the current business practices of b/ds and investment advisors, RAND collected data from a number of different sources, such as economic and business publications, previous studies, data from regulatory filings submitted by b/ds and investment advisors from 2001 to 2006, and two sets of personal interviews (one set was made up of “interested parties with different perspectives on the issue” and the other, financial-service firms.)

However, since the type and extent of the disclosures of each firm were so different, the study’s authors warned it was very difficult to get comparable data on the different kinds of firms. For example, the study says that while corporations may have multiple subsidiaries, each is registered separately as an investment advisor or b/d, and the data they collected did not identify those relationships. The study’s authors say this “suggests that many financial-service professionals themselves are confused about how they should be reporting their activities.”

What will the SEC do with Rand’s findings? The FPA’s Thompson says it is still early to tell, but he predicts “a huge cat fight” over the next 12 months. “My sense is that the SEC is going to use the study to create a new regulatory structure or at least seriously consider a new regulatory structure for brokers and advisors who provide retail advice,” he says. According to Thompson, the FPA would like to see a roundtable (similar to the SEC-hosted 12b-1 fee roundtable in June 2007), to get the industry and consumer groups to talk about the issue before the SEC takes action.

The SEC awarded Rand, an independent Santa Monica-based research organization, a contract to conduct the study in September of 2006. After more than a year of collecting data, the SEC and RAND agreed to release the results of the 219-page study three months early. RAND’s final report is due by March 25, 2008, although according to the release, neither the data nor the analysis will change.

The SEC awarded the contract for the research report in the wake of the March 2007 Court of Appeals decision that overturned the SEC’s “Merrill Rule” or “b/d exemption rule. For eight years, that rule allowed registered reps to offer fee-based brokerage accounts. The vacated rule came as a result of the Financial Planning Association’s (FPA) 2004 lawsuit against the SEC, which pointed to the blurred distinction between brokers and advisors. Although the study examines the challenges and the need for redefined regulatory distinction between advisors and brokers, it makes no policy recommendations.