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."

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