Some advisors return to the comforts of big brokerages after struggling to survive on their own. James Stoker II left Smith Barney in 2004 and co-founded a firm with six of his brokerage colleagues. He wanted the freedom to place clients in more-exotic investments such as hedge funds. But Stoker had little time to develop those strategies. Because his firm in Austin, Texas, could only afford an additional handful of people for investment management and research, he spent most of his time on day-to-day duties, such as flying to meet fund executives and plowing through their documents.

Madoff Scrutiny

After the Bernard Madoff fraud scandal in 2008, investors demanded that Stoker's small staff increase the scrutiny of its investments. During a meeting in early 2009, an institutional client asked how Stoker could verify that outside auditors of managers were doing their job.

"We couldn't answer that question other than to say we couldn't do that," Stoker says. "We were just too thin. We came back from the meeting and said we have to re-affiliate with Morgan Stanley."

Stoker, 54, wound down his company in May and took six of his people back to Smith Barney. Now, at the brokerage's Graystone Consulting unit, which advises institutional investors, Stoker says he can tap into a small army of hundreds of research analysts who handle much of the groundwork of evaluating money managers.

Fiduciary Standard

"A lot of the big independents don't have 200-some people in research and sophisticated risk systems," Stoker says. "Independents can't outspend Morgan Stanley in these markets."

Major brokerages and independent firms are also tussling over regulation. The SEC will send a report on protecting investors to Congress in January before possibly issuing new rules as part of the Dodd-Frank Wall Street reform act signed into law in July.

Registered investment advisors are urging the SEC to adopt the tough fiduciary standard under the Investment Advisers Act of 1940 that governs their profession. If advisors receive additional payments for recommending a particular fund over another, they must fully disclose the arrangement and obtain informed consent from investors every time they sell such a product, says Falls Church, Virginia-based Knut Rostad, chairman of the Committee for the Fiduciary Standard, a group of financial professionals. Advisers must also manage conflicts by, for instance, crediting that additional payment to their client's account rather than accepting it themselves, Rostad says.

Potential Payoff

The Securities Industry and Financial Markets Association, a lobbying and trade group based in New York, says the stringent fiduciary rules of the 1940 act are unnecessary to safeguard investors and would restrict their options. SIFMA does support the idea of more disclosure.