If You're a Broker and You Know It

As the holiday season approaches, the SEC is getting daily entreaties from registered investment advisors seeking an end to the broker/dealer exemption rule. The rule says brokers who charge fees for their services are exempt from regulation under the Investment Advisers Act of 1940, so long as the advice they dispense is incidental to the brokerage services, the advice is nondiscretionary and the

As the holiday season approaches, the SEC is getting daily entreaties from registered investment advisors seeking an end to the broker/dealer exemption rule.

The rule says brokers who charge fees for their services are exempt from regulation under the Investment Advisers Act of 1940, so long as the advice they dispense is incidental to the brokerage services, the advice is nondiscretionary and the broker discloses that the accounts are in fact brokerage and not advisory accounts.

RIAs are irked by the rule because they claim it allows brokers, in essence, to pose as advisors.

To bolster their case against the exemption, a network of independent advisors called Zero Alpha Group commissioned a survey of investors. The survey, conducted by Opinion Research Corp. of Princeton, N.J., and co-sponsored by the Consumer Federation of America, concluded that the average investor does not understand the difference between a broker and an advisor. According to the survey, only 26 percent of investors understand that the primary role of stockbrokers is to buy and sell investment products. Additionally, 53 percent believes that investment advice is a key service offered by stockbrokers.

“What good can it possibly do to tell investors that an account is a brokerage account if most investors mistakenly believe that brokers are advisors?” says Barbara Roper, director of investor protection at CFA.

The five-year-old exemption, also known as the Merrill Lynch rule, has been under consistent attack from the RIA community this year. They say some b/ds have taken advantage of the loophole by advertising their firms' “advice” and “financial planning” prominently on Web sites and in ad campaigns.

The SEC has said it will take action on the rule before the year is over. Generally, brokerage executives believe they are subject to more than adequate regulation. But one UBS broker acknowledged that many brokers play up their planning skills to get a leg up, and he believes that most brokers will simply end up expanding their training to meet the demand for such services.

“I think we'll all end up being registered investment advisors one way or another,” he said.

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