Rule’s death no help for investors

NEW YORK — The demise of the broker-dealer exemption rule likely won’t help investors understand the role of their financial professionals or the relationship between fees and services rendered, advisers say.
Last week, the Securities and Exchange Commission decided not to appeal the court decision to throw out the rule, which had exempted fee-based brokers from the fiduciary requirements to which advisers must adhere. Many advisers called the SEC’s decision a victory for the individual investor — with limitations.
“It’s a baby step in the right direction,” said Tim Decker, president and chief executive of ISI Financial Group Inc., a fee-only registered investment adviser firm in Lancaster, Pa. “But this isn’t the salvation that will clarify the inherent conflict of interest when pay comes from anyone other than the client himself.”
The American Association of Individual Investors in Chicago and the National Association of Investors Corp. of Madison Heights, Mich., declined comment on the SEC’s decision and its implications for investors.
As part of the exemption rule, the SEC defined financial planning as a process that “seeks to address a wide spectrum of a client’s long-term financial needs, including insurance, tax and estate planning, and investments.”
Investment advisers have an obligation to act in their clients’ best interest, while brokers can sell products that may be suitable but not necessarily the best choice for their clients. Both professionals offer financial services, but the line defining the two is blurry for the investor — especially under the term “financial planner,” financial advisers say.

Murky territory
“From a client’s point of view, it’s hard to tell the difference when you’re dealing with a financial professional,” said Charles Hertlein, a broker-dealer compliance attorney in the Cincinnati office of Dinsmore & Shohl LLP, which has different offices and no headquarters.
“Major firms have been moving toward the investment adviser approach and away from the traditional broker-dealer approach,” he said. “If you go to UBS [Financial Services Inc. of New York] and are assigned a person to be an adviser, it’s not at all clear what capacity they have.”
Now that fee-based brokers will have to take on fiduciary responsibilities, investor advocates are calling for increased disclosure from the SEC that would help define the role of different financial professionals. The SEC declined to comment on any specific plans it may have to draft additional rules or measures to make investors aware of the different responsibilities.
Financial professionals’ fees versus the services they can provide are a key point for investors, according to John Burns, chief executive of Burns Advisory Group, an RIA firm in Oklahoma City. Fee-based brokerage accounts charge based on the number of trades made, while advisory accounts typically charge according to the percentage of assets under management.
The average annual fee for a fee-based brokerage account is 0.98%, versus 1.08% for advisory accounts, according to Cerulli Associates Inc. of Boston.
Problems arise when registered representatives come under pressure to perform as employees, which can clash with providing clients the ideal products, said Mr. Burns, who once was a rep at Boston-based John Hancock Financial Network and left to start his own advisory firm.
“When you work for a major company, the goal is to serve the client, but you also want to sell the company’s products and increase the client’s profitability,” he said.
Hidden revenue sources, such as 12(b)-1 fees, the marketing fee mutual funds collect from clients, can siphon off cash, Mr. Burns added.
Clients who are aware that their brokers’ interests may conflict with their own are less likely to go to a brokerage firm for financial advice, according to the TD Ameritrade Investor Perception Study 2006. TD Ameritrade Institutional is based in Jersey City, N.J. After reading an SEC-required disclosure for fee-based brokers that says, “We are paid both by you and, sometimes, by people who compensate us based on what you buy,” 79% of those polled said they would be less likely to use a brokerage firm for financial advice, according to the survey of 1,000 investors. About 66% of those surveyed said they felt the disclosure was insufficient warning for clients.
“We’ve asked the SEC to help educate investors,” said Barbara Roper, the Pueblo, Colo.-based director of investor protection at the Consumer Federation of America, which is based in Washington. “As long as brokers are free to call themselves advisers and offer advisory services, you’ll never be able to educate investors to understand the differences between brokers and other advisers.”
In an attempt to clarify the differences for clients, the CFA, in collaboration with the Denver-based Financial Planning Association and other groups, last year created a brochure titled “Cutting through the Confusion.”
The only way for the SEC to create a pro-investor policy would be to issue a single set of disclosures that outlines the responsibilities for all financial services providers, plus a policy that subjects these financial services professionals to fiduciary standards, Ms. Roper added.
Getting tough
Until and unless that happens, consumers will have to step up and demand more from professionals, Mr. Burns said.
“Investors must be educated to ask if their professionals are paid in other ways aside from the fees they collect,” he said. “They need to know what their adviser’s compensation arrangements are and ask for that in writing.”
Others agree.
“You can’t sit back and wait for the government to address your problems,” ISI Financial’s Mr. Decker said.