Broker-rule decision, PPA called boons to advisers

CHICAGO — The Pension Protection Act of 2006 and the court decision overturning the broker-dealer exemption rule are…

CHICAGO — The Pension Protection Act of 2006 and the court decision overturning the broker-dealer exemption rule are making business prospects better than ever for registered investment advisers, according to J. Thomas Bradley Jr., president of TD Ameritrade Institutional.
Data recently compiled by the Jersey City, N.J.-based asset custodian found that registered investment advisers controlled 14% of U.S. investible assets as of March 31, an increase of 100% from the level of December 2001.
Although full-commission brokerage firms currently control 27% of the market, their share declined by 22% over the same period.
During the 12-month period through March, assets under management by TD Ameritrade Institutional’s advisers rose 26%, compared with a 9% increase for leading full-commission broker-dealers, the firm’s data show.
“More individuals are becoming aware of the registered investment adviser model and are becoming especially aware that they are operating as fiduciaries, and they find it more favorable,” Mr. Bradley said after speaking at the Arlington Heights, Ill.-based National Association for Professional Financial Advisors’ national conference here early this month. “We are not predicting the demise of the full-
commission brokers, but we think that individuals are more inclined to seek advice from a fiduciary than someone who operates on a sales model.”
Exemption rule fallout
The demise of the broker-dealer exemption rule — today is the deadline for the Securities and Exchange Commission to appeal the decision of the U.S. Court of Appeals for the District of Columbia Circuit — should help registered investment advisers attract more business, Mr. Bradley said.
The court on March 30 overturned the 2005 rule, which exempted firms that charge asset-based fees from investment advisory regulations under specific conditions, after a challenge by the Denver-based Financial Planning Association.
“The most likely scenario would be the one that exists today,” Mr. Bradley said at a lunchtime session at the conference. “Many brokers at full-service firms wear one hat as an investment adviser and other times [are] wearing the broker-dealer hat.”
“If the broker-dealer rule is ultimately shot down, these guys will have to wear two hats. I think it will put brokers in a very difficult position, and it would probably fuel the investor confusion that is out there already,” Mr. Bradley said.
“The best solution for the full-commission brokers is to have some individuals acting as fiduciaries and another group acting as salespeople,” he added.
The broker-dealer conflict issue easily can be resolved, Mr. Bradley stated, by not allowing investors to work with advisers who act as both salesmen and advice givers.
Advisers look to benefit from the fact that the Pension Protection Act likely will lead to greater 401(k) plans enrollment, larger plan assets and more companies hiring investment advisers to provide advice to those plans, he said.
A safe-harbor provision in the act encourages sponsors to hire fiduciaries.
Mr. Bradley noted that 22 million eligible workers currently don’t enroll in their employer’s 401(k) plan and that 90% of those who do enroll end up staying in the plan.
Some 4,000 registered investment advisers keep a total of approximately $70 billion in assets under custody at TD Ameritrade Institutional.