SEC Says Brokers Can Be Advisors Too -- for Now

Securities regulators moved Wednesday to allow stockbrokers to continue calling themselves financial advisors, and to charge fees for their services, without having to follow the same rules as independent advisors.

Financial planners blasted the Securities and Exchange Commission’s temporary order, which expires in April. By then, the SEC hopes to have come up with a permanent answer to the question of whether stockbrokers who also call themselves financial advisors or consultants should have to register under the Investment Advisers Act and abide by its rules.

The key difference among the panoply of rules governing brokers and planners is fiduciary duty. Planners, under the terms of the act, are bound to act in the best interest of their clients.

“Stockbrokers are not fiduciaries. Merrill Lynch has a duty not to defraud you -- they don’t have a duty to protect you,” said James Wilson, a financial planner from South Carolina. “It’s all about the F-word.”

The selling of investment advice used to be distinctly detached from the brokerage business. Advisors were paid flat fees and brokers got sales-based commissions.

Then, in the mid-1990s, Wall Street started selling fee-based brokerage accounts. They were launched in response to an influential report that noted how investors were often best served if their portfolios were left alone, while brokers only profited when investors traded.

A committee established to study practices in the brokerage community suggested a new compensation model for brokers: pay based on their clients’ assets instead of their clients’ trades.

The idea was that fee-based accounts, which normally set pay based on a percentage of assets held by the customer, would align the interests of the customer and the broker because brokers would be paid more when customers prospered.

The accounts have become big sellers, holding some $250 billion in assets.

Securities laws written in the 1930s and 1940s required brokers to become investment advisors if they changed the structure of their pay. The SEC, aiming to accommodate a more investor-friendly compensation structure, exempted brokers offering fee-based accounts from the Investment Advisers Act through an administrative proceeding in 1999. But the SEC never issued formal rules to clarify where the lines were drawn.

Financial planners have been complaining ever since, saying brokers aren’t held to the same standard of fiduciary duty as planners are.

Last summer, the Financial Planning Assn. sued to compel the SEC to issue permanent rules. Wednesday’s ruling, a response to the suit, temporarily maintains the status quo, but only until April.

The SEC has already opened a public comment period on the issue and has received 1,700 letters.

“This is something of a semantic battle, but words are very powerful,” said Elizabeth Jetton, president of the financial planners’ group.

“The public has a hunger for advice that’s grounded in expertise.... To offer this exemption without truly defining what disclosures need to be made and without having to live by the same standards and duty of care is clearly unfair to the public,” she said.

SEC officials said they expected to continue to allow the exception for fee-based brokerage accounts but might require brokers to emphasize that what they are selling is a brokerage account, not a managed investment account.

Brokers argue that they are bound by sufficient rules. For instance, they must follow so-called suitability rules that demand they only recommend investments that are suitable for their clients, said Ian Hammerman, general counsel with the Securities Industry Assn.

“The broker-dealer side has extensive regulation, extensive supervision, extensive litigation. There is no free pass,” Hammerman said.

“To disrupt what has evolved over the last several years as an acceptable way of doing business, with a product that’s clearly desired by a growing segment of the investing public, would be wrong,” he said.