Who will walk the walk?

    While advisors talk a good game about their desire to see consumers protected by meaningful regulation, the Financial Planning Association remains the sole litigant in its lawsuit against the Securities and Exchange Commission's so-called Merrill rule. In fact, the FPA can't even count on any of the associations, societies or boards representing planners and advisors to file written comments with the federal appellate court hearing the case, since all missed the deadline for indicating they would do so.
    Why, for instance, would the National Association of Personal Advisors (Napfa) ignore the opportunity to speak out about fiduciary duty-a topic it has turned into its own personal bragging right? "That's an interesting question," says past Napfa Chairman Jamie Milne, who left office in September. "The largest reason we haven't done a whole lot is we don't have the resources, not only in terms of dollars, but the staff time to follow through or do a decent job." Napfa's executive director and current chairman were at a regional conference and unavailable for comment. The group's chairman-elect did not return calls while this article was being written.
    While it's easy to understand why the costs of waging a lawsuit could be a deterrent, it's less clear why groups didn't at least indicate they would file a brief with the federal court in the case. All the relevant associations and groups have filed several comment letters with the SEC over the past five years, protesting the rule. While there are costs involved in turning a comment letter into an amicus brief, the costs are hardly insurmountable. After all, Napfa can count among its members some of the largest and more profitable wealth management firms in the country. 
    In any event, that opportunity is past. This lawsuit may decide the fate of investors and advisors with regard to regulation for years to come. And it will certainly become at least a page, if not a chapter, in the history book of evolving fiduciary law. So why not file a brief?
    "I'm not sure why we didn't do that," says Milne. "It may be for the same reason we didn't file a lawsuit-money." The group's 1,100 members routinely boast about their "Oath of Fiduciary Duty," even in releases dressing down the SEC for its BD rule. But while forward-looking, the oath does little to protect the investors who work with the nation's other so-called financial consultants: those 660,960 brokers and 19,306 advisors nationwide who are not Napfa members.
    The two new fiduciary-based associations for advisors find themselves in a similar boat. Neither the National Council of Financial Fiduciaries nor the Society of Fiduciary Advisors will file comments with the court in the FPA case, though both claim they were founded to advance a truer understanding of advisors' fiduciary responsibilities. "We're brand new. We're just getting set up," says Thomas Gryzmala, an executive board member of the National Council of Financial Fiduciaries, which was founded approximately one year ago. "We really just don't have the resources."
    The group did, however, e-mail reporters a press release this summer scolding the Securities Industry Association for its "childish behavior" in seeking to delay the implementation of the BD exemption rule (it's the disclosure requirements for broker-dealers that is the sticking point for the industry) from September until January. The SIA won.
    The CFP Board will also be absent from the list of those filing "friends of the court" briefs in the case. And instead, the board will focus on it's own Code of Ethics. "We're looking at the way they're structured, so that they're easier to understand," says CFP Board Member Dan Candura.
    And so, while the Consumer Federation of America and the North American Securities Administrators Association and Fund Democracy and the Public Investors Arbitration Bar Association have all indicated their intention of filing briefs with the court, the deadline is closed to all others. No planner or advisor group, besides the FPA, will be able to show its support for the cause of investors' fiduciary rights in this long-awaited court battle.
    How much will the trial cost the FPA? The FPA's Group Director of Advocacy Duane Thompson declined to say, although earlier estimates had put the legal tab at around $50,000. "FPA has the resources to adequately litigate this matter," Thompson says. "Our board decided this when they voted to go forth with the lawsuit." 
    Why other advisor-centric associations haven't joined the FPA "might have been a relevant question last year, but it's just not something we think about now. Frankly we didn't try and solicit other planning organizations," Thompson says. In fact, while the overwhelming majority of FPA's members supported bringing the SEC to court over the BD rule, very few thought the association should do it as a group effort with other organizations.
    The FPA is arguing that the SEC erred when interpreting Congressional intent to mean brokers should be exempt from having to register as investment advisors, even when offering investment advice. If brokers are exempt, they are not required to put their clients' interest above their own.
    Ironically, though, the rule does require brokers to tell clients precisely that own interests may diverge from their clients, a development that prompted the SIA to request a delay in implementation of the rule. The SEC granted the SIA's request late last summer, and some fear the agency may further cave in to pressure from the wirehouses and relax the painful nonfiduciary disclosure requirements in the current rule.
    "What we fail to understand is why the SEC would propose a rule that allows brokerage firms to misrepresent and actively market themselves to investors as trusted advisers, instead of disclosing their true role as sales agents, under the B-D rule," former FPA President Elizabeth Jetton said when she announced the lawsuit last year at the National Press Club in Washington, D.C.,. "The critical problem with the rule proposal is that it allows stockbrokers to call themselves financial planners and financial consultants, and to provide fee-based financial planning services under more lenient broker-dealer sales regulations."
    Obviously, a number of other people can't understand that either. An end-of-summer TD Waterhouse survey shows that advisors clearly support equal regulatory protections for investors and believe further reform of the SEC's broker-dealer exemption rule is necessary. "With more and more brokerage houses aggressively marketing fee-based 'advisory and planning' accounts, investors are increasingly at risk," says Tom Bradley, president of TD Waterhouse Institutional Services. "At a time when we need to be boosting investor confidence in markets, this rule creates more confusion for investors and leads to greater uncertainty about who consumers can trust for investment advice."
    The survey of 2,900 advisors found that 92% believe that all providers of fee-based advice should offer equal levels of protection to investors. To achieve this, advisors said they support reforms such as new legislation and eliminating or modifying the SEC's broker-dealer exemption. A whopping 82% support a new Congressional mandate that sets forth one clear uniform standard of investor protection for all providers of fee-based financial advice.
    When it comes to challenges to investor protection, 95% of advisors said they believe the rule will be harmful to investors, while 86% believe it will reduce investor confidence. The TD Waterhouse survey also found that 82% of advisors believe that the fiduciary and disclosure requirements are important to their clients, and some 70% believe these enhanced protections give them a competitive advantage over brokers. Still, 88% of advisors surveyed support reforming the rule to ensure investors receive equal protection from all financial professionals offering fee-based advice.
    "This survey clearly underscores that RIAs are solidly on the side of the investor," says Bradley. "There's a clear message here to do the right thing for investors."
    When confronted with the question of uneven regulatory protection-obviously not the hot topic of breakfast conversation in most homes-investors,  are very sensitive to the issue, TD Waterhouse found in a survey of 1,000 investors last fall. Sadly, 58% of investors incorrectly believed that both stockbrokers and advisors have fiduciary responsibility to act in the investor's best interests; 83% expressed concern about the different levels of protection and 86% said their choice of a financial professional would be impacted if they understood that there were unequal levels of protection being offered by RIAs and broker-dealers.
    What is clear, says Don Trone, founder and director of the Center for Fiduciary Studies in Pittsburgh, is that "no one at the SEC has a financial planning or advisory background. They don't understand the industry. They just don't get it. As a result, they've done a terrible job. They have to define the demarcation between brokers and advisors, and they haven't done that yet."
    Whether or not the FPA will prevail in court remains to be seen. But it is clear is that its board and 28,000 members have stepped up to the plate. The Securities Industry Association (SIA), which throws its hefty Wall Street membership and luxurious PAC dollars around quite handily, has won a good bit of the battle to date to influence the SEC. The most telling sign? Besides the fact that to promulgate this rule the SEC had to go against state securities regulators, consumer groups and 1,700 advisors in a pro-disclosure, post-Enron, Post-Worldcom climate? The U.S. House Banking Committee lifted entire sections of its counsel's comment letter to the SEC from the SIA's own finely-honed missive to the agency.
    Still, don't count the FPA out. The U.S. Chamber of Commerce successfully sued the SEC in June, forcing the agency to vacate its mutual fund governance rule because it had failed to properly consider compliance costs and whether full disclosure might work as well. Stay tuned. The court is likely to set deadlines for briefs from the FPA and SEC any day.