New FPA takes on 800-pound gorilla in first fight

In its first major stand — and test of its clout — the newly united organization of financial advisers is fighting the so-called Merrill Lynch Rule.

The Financial Planning Association, created by the merger of the field’s two principal trade groups, commenced operations this month and made the measure one of its first orders of business.

The rule, drafted in response to Merrill Lynch & Co. Inc.’s new asset-based fee service, would free stockbrokers from registering with the Securities and Exchange Commission and complying with the strict fiduciary standards that apply to fee-based advisers.

Brokers would still be able to sell clients’ securities from their own inventory — a practice generally forbidden to advisers — as long as they do not have discretion over investing their clients’ money.

Such a move would weaken investor protection and confuse the public, the new group asserts.

The proposal goes “well beyond the scope of the exemption Congress intended,” says Duane Thompson, the association’s director of government relations, wrote to the SEC.

Merrill Lynch’s Unlimited Advantage Account prompted the rule and the association asserts that it “markets comprehensive advisory services for a single fee, rendering highly questionable the…`traditional brokerage programs’ premise for the proposed rule.”

Merrill Lynch spokesman Bill Halldin disputes that view.

“The Unlimited Advantage agreement is very clear and very specific. It explicitly states that we are not acting as an investment adviser. The advice clients receive is the advice you’d receive as a brokerage account.”

While the battle has some elements of a turf war — major brokerages like Merrill Lynch are expanding fee-based services — financial planners say much more is at stake.

“Regulation should not allow brokerage accounts to serve as advisory accounts with less protection,” writes Robert Gross, president of the Certified Financial Planner Board of Standards, which licenses members of the FPA.

The Investment Counsel Association of America, which represents SEC-regulated advisers, agrees. Its position is: “If an account bears the fundamental characteristics of an advisory account — or if it is marketed as such — it should be subject to the provisions of the Advisers Act.”

While proponents say there are distinct differences, the Consumer Federation of America cited a recent Prudential Securities magazine advertisement as an example of how brokers are selling the advisory aspects of their services.

The ad states: “With Prudential Advisor, your Financial Advisor is not compensated based on your trading activity. Instead, you pay a simple asset-based fee for the advice you get and a low price for trades.”

Barbara Roper, the consumer group’s director of investor protection, says that most brokerage firms are clearly selling advice: “I’d be happy to consider them an adviser as long as I can regulate them as an adviser.”

Pru reps registered

Prudential Securities spokeswoman Susan Atran says Prudential Advisor accounts are registered as investment advisory accounts with the SEC, and Prudential employees selling the accounts are registered as investment adviser representatives.

Under the rule, Prudential Securities, with some adjustment, could sell its Prudential Advisor account through its brokerage, instead of limiting it to registered investment advisers, says Robert Plaze, associate director of the SEC’s Division of Investment Management.

“These new accounts are potentially a substitute for full-service brokerage accounts, the way we know them today,” he says.

Brokers also have fewer requirements to disclose potential conflicts of interest and, unlike advisers, are not legally required to act as fiduciaries for their clients.

Paine Webber Group Inc. deputy general counsel Rudolph Gerlich wrote the SEC that the proposal “correctly recognizes that the type of service broker-dealers provide, rather than the nature of their compensation, is the factor of principal importance in determining the applicability of the Advisers Act.”

The SEC says it proposed the rule to encourage brokers to get away from selling on commission, which can create conflicts of interest.