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Adviser rule change puts the investor first

By Helen Huntley, Times Personal Finance Editor
Published May 20, 2007


If you've got a fee-based brokerage account, the winds of change are blowing your way. Your broker might even end up being required to act in your best interests, if you can imagine that.

Roughly a million brokerage accounts with $300-billion worth of investor assets are affected. You're among them if you pay your broker a regular fee typically 1 to 2 percent of assets each year instead of commissions.

These accounts have been caught in the crossfire between two types of investment advisers:

-Registered investment advisers, who typically call themselves financial planners or money managers.

-Brokers, who often call themselves financial advisers or financial consultants.

Most investors probably can't tell the difference, yet the two groups have operated under different sets of rules. Until now, registered advisers have been held to a higher standard, required to be fiduciaries and put clients' interests first, disclosing how they are compensated and revealing conflicts of interest. But the Securities and Exchange Commission, in what came to be known as the "Merrill Lynch Rule, " exempted brokers from these requirements under certain conditions.

The Financial Planning Association sued the SEC three years ago, saying it was wrong to let brokers off the hook. In March, a federal appeals court ruled in the association's favor and last week the SEC threw in the towel, saying it will not appeal. It asked the court to give brokers four months to comply.

Financial planners are celebrating, but some brokers are having fits.

"Why should Merrill Lynch and other brokerage firms be given a pass from this standard which requires full disclosure of conflicts?" asked Clearwater financial planner Ray Ferrara at ProVise Management Group.

The Securities Industry and Financial Markets Association, which represents brokers, said it is outraged.

"One million investors will be disadvantaged - forced into accounts where choices are limited and costs to consumers can be nearly double, " said Marc Lackritz, the industry group's president. He said the association intends "vigorously to pursue a solution that will enable investors to have access to fee-based payment options."

One possibility is that brokers will pressure Congress to change the law to exempt them from the fiduciary requirements. Merrill Lynch, which has nearly 400, 000 fee-based accounts, declined to comment officially but told its brokers to continue using "the full range of services that make sense for your clients."

The truth is brokers won't go out of business if they put clients first, and the clients won't all pay more. Most likely, brokers will give their clients the same choice that St. Petersburg-based Raymond James & Associates offered its clients two years ago when it dropped fee-based accounts.

The options: Go back to a regular brokerage account paying commissions for trades or sign up for a full-fledged advisory account with all the disclosures.

Fee-based accounts were supposed to put brokers and clients on the same side because there was no incentive to trade an account just to generate commissions. But they've turned out to have pitfalls of their own. At some brokerages, including Raymond James, many clients who never or rarely traded ended up paying fees that brought them little benefit.

The bottom line: If you're going to market yourself as a financial adviser, you ought to be required to put your client first. It's really not too much to ask.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs.tampabay.com/money.