Independent advisors recently got the opportunity of a lifetime-the marriage made between fee-based advisory accounts and fiduciary accountability finally made headlines in the SEC repeal of Rule 202. The Merrill Lynch Rule, as Rule 202 was called, allowed brokers to be compensated with a fee without having to register as an investment advisor. Hence, the big move at large wirehouse firms to fee-based accounts and away from the vanishing commission-based model, the label of "broker" exchanged for the magic word "advisor" in the process.

This was the beginning of the age of confusion for investors. Years ago, the lines between bankers, brokers and trust officers were pretty clear. Because of a number of factors, including the advent of separately managed accounts (SMAs) in the late 1970s and the repeal of the Glass-Steagall Act in 1999, those lines became blurred as investors began to find all of these services under the single roof of the large retail brokerage house. As SMAs grew in popularity, they brought with them a fee-based compensation model and a consulting process that, ideally, would deliver a more balanced, comprehensive approach to managing risk and addressing investors' needs. Many newly dubbed wirehouse advisors began employing the consulting process by gathering client information on lengthy questionnaires, feeding it into a computerized risk assessment program and generating programmed asset allocations.

Changing a title doesn't necessarily qualify someone to give investment advice, though. The concern of trained and licensed professionals in the industry that these advisors were not actually registered to give fee-based advice was legitimized by the SEC in reversing the ruling.

Lon T. Dolber, the CEO, CIO and president of American Portfolios Holdings Inc., says it clearly. "If the client is paying for a service, if they are getting something in return for their money, brokers or advisors can justify that. If they are rebalancing, providing performance reports, monitoring the portfolio and so on, that is meaningful. But if all they do is execute transactions and charge a fee to do that, obviously they simply should roll the clients back to commission accounts. A broker should ask him/herself: What did you represent to the client that you were going to do for them? On the fee-based brokerage, a broker represents one thing: executing transactions for a fee instead of a commission ... now you are saying you are executing transactions, but as an investment advisor. Guess what? You can't just do that."

But what does this change really mean for independent advisors, if anything? Is exoneration enough, or is there more that comes out of this? Will a portion of the $300 billion currently in fee-based brokerage accounts become available for capture by independents?

Comments From The Field

Will the ruling reversal cause investors to break through wirehouse doors in a scramble for meaningful, independent advice? Will herds of brokers vacate the premises at wirehouses to establish themselves in the independent world? Not likely to the extent some are predicting. Says Andy Kaiser, president and founder of Mountain Hill Investment Partners (affiliated with American Portfolios Financial Services and American Portfolios Advisors), "I think an exodus from the large brokerages is happening, but at a slower pace than I had expected. It is just a matter of time and education for their clients. We in the independent space would be well-served if we had a way to educate brokerage clients of the real facts of their relationships with the big firms."

Clinton H. Hodges, senior director at BNY Mellon Wealth Management in Los Angeles, predicts that "wealth managers who act on a trust platform as an alternative to registered investment advisors and brokers will also see an increase in new business coming from the SEC-mandated changes." He also notes that although clients are becoming more sophisticated, many still do not understand the distinction between financial advisors on a brokerage platform and fiduciaries on a trust or RIA platform.

But it is, in fact, a real opportunity for independent registered investment advisors to distinguish themselves through the consulting model they were offering long before their wirehouse counterparts even heard the words "fee-based." "When you're doing true consulting and planning, you're really positioning yourself as a consultant with the client," says Tom Froehlich, CIMC, CIMA, president of Froehlich Financial Group Ltd. in Spring Lake Heights, N.J.

Most independent advisors agree that the issue is not the repeal of Rule 202, but a focus on the quality of service, the consulting and the accountability offered investors. In that sense, it may be an opportunity for independents to garner new relationships. "Anytime clients have to sign new documents, it potentially puts money in motion," says Lewis Walker, president of Walker Capital Management Corp. in Norcross, Ga.

And where there's money in motion, Mary Howard, CIMA, President, Branch Manager, Howard Wealth Management LLC, Sioux Falls, S.D., agrees with him and believes that opportunity abounds. "The money in motion offers a grand opportunity, as not all reps actually do the necessary advisory activities required to have-and to keep-a true advisory relationship," says Howard. "The independents could be large benefactors in this change."
J. Bryan Ballentine, a CFP licensee and the president of Ballentine Financial services, notes, "This is a time to build on the momentum that's been growing in our own firm for some time. We've been preaching this sermon and now we have confirmation from the courts. If we had not already laid the groundwork to differentiate our services, the ruling alone would do little. Now, we must marry our groundwork with the court's ruling to show the difference between our fiduciary role and the wirehouse broker's role."

Wirehouse Briefing

In response to the SEC's defeat in a federal administrative court, wirehouses are either segueing clients from the old fee-based accounts to new, nondiscretionary advisory platforms or into straight commission accounts. All five of the giant houses now have nondiscretionary advisory programs in place, which  sounds almost like a contradiction in terms.

Still, Smith Barney managed to position itself ahead of the game. According to the firm's media statements about their SB ADVISOR account, which they created and launched in 2005 in anticipation of the decision, "Smith Barney ADVISOR is a capability that incorporates multiple products into a nondiscretionary fee-based platform. We've eliminated product barriers to include a broad range of mutual funds, as well as listed equities and fixed income. We'll even use assets clients hold at other firms within the proposal when establishing asset-allocation parameters, as well as for tracking for suitability."

Even before the SEC's defeat in court. many financial advisors started transitioning their business into their advisory programs, and as of the end of September, approximately $18 billion (or 90%) of these assets called Smith Barney's AssetOne program their home. Merrill Lynch is promoting ML Personal Advisor-a nondiscretionary advisory account-to their fee-based brokerage clients, but did not wish to discuss any particulars at this time. UBS recently lowered the minimums for its Strategic Advisor program to $50,000 to help smaller clients make the transition.

But according to Walker, it's the wirehouse training that is a sticking point. He points to the SEC's court defeat as "casting a spotlight on the nature of the client/counselor relationship." He says, "A fiduciary relationship is one of trust and confidence. It demands deep discussions between advisor and client to establish what is in the best interest of the client. The wirehouses have not trained their advisors to have those conversations."

Strategies To Seize The Moment

Howard says the change is causing her firm to rethink its marketing strategies. Indeed, notes Walker, "If a [wirehouse] relationship has been lacking, the existing broker will have an opportunity to reframe and even expand the client relationship. However, if the client has not been satisfied, such a repapering exercise will be a tipping point and money will migrate to independent advisors."

Lawyer Patrick J. Burns Jr. notes that his firm has been witnessing brokers moving from the wirehouses to independent RIA platforms. "It's the final reason needed for brokers who have been thinking about leaving a wirehouse to make a move to their own firm. When clients realize that RIAs are fiduciaries and, as such, are obligated to look out for their best interests, they can get pretty excited when they find out their rep has established his or her own RIA." He adds that clients who do complain about the process of moving their accounts offer advisors the opportunity to pare down their books of business and work with those who appreciate the level of service being offered.

But other than jumping on a marketing opportunity or taking the plunge to start their own RIA firms, what other actions can advisors employ to take advantage of the favorable landscape? Two things readily come to mind: educating clients and prospects on what a fiduciary relationship really means to them and focusing on life situations affecting their clients. According to Martin Resnick, a CPA, and a partner and managing director at Resnick Investment Advisors LLC, "We have seen the majority of our business coming from wirehouses because clients are more concerned with how their money is being managed as they age and plan for their future and their children's future. Clients don't want brokers who are pushing the latest financial product in a nonfiduciary client relationship."

  "These issues go well beyond money," explains Walker, who agrees with Resnick. "We have a glut of people over age 50 facing retirement and a host of other issues. One of the most critical is health care." Froehlich concurs. "You should be knowledgeable about a variety of health care issues. After I turned 50, I went through the whole nursing home issue with my parents. I understand from personal experience what a life estate is." With the first baby boomers recently applying for Social Security, health-care issues promise to make a significant impact on clients' financial lives.

On the education front, advisors can author newsletters to clients and prospects, post material on their Web sites and offer special events like seminars and client appreciation nights that clarify the role of a fiduciary and the differences between a fiduciary relationship and a non-fiduciary relationship. Writing articles on the subject and alerting the local media help establish a relationship with an editor or reporter, and help educate the public at the same time.

"We're doing seminars on a regular basis targeting doctors and accredited investors," says Chad Coe, president of Coe Financial Group in Deerfield, Ill. "We've been sharing with our clients the difference between an ongoing relationship where we act as responsible advisors managing their relationship with third-party money managers and the brokerage model, which may not always have their best interests at heart."

Indeed, when employed judiciously, the SMA consulting model fits hand in glove with the fiduciary relationship. For those who have been using SMAs with their clients, the extension to education about fiduciary relationships is a logical next step if it has not already been taken. For advisors who have anticipated the SEC ruling and who have already been talking about fiduciary relationships, the reversal offers them another opportunity to show the value they bring to their clients.