The so-called "Merrill Lynch" rule
that took effect last week and exempts certain brokers from the full
set of responsibilities that registered investment advisors must follow
is only a "first step," according to former SEC Chairman William
Donaldson, who spoke at TD Ameritrade's annual advisor conference in
Orlando, Fla., on February 2.
Donaldson served as SEC chairman from 2002 until
late 2005, when he resigned under pressure from business lobbyists who
felt he was pushing regulatory reform too far.
Donaldson told advisors that the SEC has said a new study "is coming down
the pike" and it may end up as legislation. "That's the end game," he said.
"The (Merrill rule) is a first step. The end game has not yet been played."
Nonetheless, Donaldson called the Merrill rule "a good sales tool" for
advisors. The new rule "advances the distinctions between brokers and
advisors, between fiduciary and suitability," he added.
Donaldson also praised the entrepreneurial nature of the RIA profession,
while warning that a scandal could set the business back a long way. "It's
quite clear your industry has a great amount of energy, drive and
entrepreneurialism," he said.
However, that entrepreneurialism needs to be
redirected internally to create the "firms' internal DNA," he said. As
entrepreneurs, advisors need to "reconceptualize where you fit in
within the industry, he explained, adding that his favorite example of
this was FedEx founder Fred Smith, who saw something "that was there
for the airline industry to see."
Donaldson warned advisors of the importance of
maintaining high ethical standards. "We've had too many independent
RIAs who fudged performance numbers, (exaggerated) performance results
and cherry-picked performance dates," he said. "Your reputation is the
most important product you have. You have a tremendous opportunity. The
only way you'll blow it is if you damage your credibility."