Second Thoughts Surface On Broker Exemption Rule
Be careful what you ask for, you just might get it.
After five years of lobbying behind the scenes for a broker-dealer
exemption from registered investment advisor (RIA) regulations, the
Securities Industry Association (SIA), Wall Street's chief trade group
in Washington, emerged victorious earlier this year.
But a funny thing happened as the Wall Street gravy
train began its victory parade this summer. Upon further examination of
the so-called Merrill Lynch rule, some of the nation's biggest
wirehouses either are having second thoughts or at least voicing
confusion. As a result, SIA has asked the Securities and Exchange
Commission to delay implementation of the approved rule from October
24, 2005, until April 1, 2006. Though SIA wields much greater influence
in Washington than the smaller Financial Planning Association (FPA),
which opposed the rule, SIA's success is looking increasingly like a
Pyrrhic victory.
FPA filed a lawsuit against the SEC last year over
the proposed rule, and has continued to criticize the SEC after its
adoption, arguing that it would confuse consumers by allowing brokers
to price their services and structure their products like advisors
while avoiding the liability that goes with it. Fee-based accounts,
which the rule addresses, have become increasingly popular in the last
decade, although regulators have started to crack down on reverse
churning, or accounts charging annual fees for which brokers provide
little ongoing service.
The dispute centers on the different regulations and
standards governing brokers and RIAs. Brokers are required to decide
whether specific investments are suitable for clients, while RIAs have
fiduciary obligations to act in the client's best interests. In
general, the fiduciary standards that RIAs are expected to uphold are
thought to be significantly higher and carry greater levels of
liability, though brokerage standards have grown increasingly
complicated and arduous in recent years.
Though SIA and the wirehouses initially appeared to
win the battle, a close reading of the new rule revealed that brokers
who invoked it would be required to make extensive disclosures to
clients-disclosures that would indicate their own interests might
diverge from the clients'. Sources say that, when confronted with these
disclosures, more than a few wirehouse brokers have voiced
understandable reluctance to tell clients that they may put the firms'
interest above that of individual investors. Consequently, several
firms are converting client relationships and accounts to RIA accounts.
Since a growing number of brokers are exiting
wirehouses and, in some cases, becoming RIAs, executives at the big
firms may fear the exodus could accelerate. At the heart of the most
recent confusion is the meaning of "solely incidental" advice under
which brokerages could seek safe harbor through the exemption. "FPA
remains deeply concerned that, after six years of debate, the question
of what is 'solely incidental' remains unresolved," says Duane
Thompson, the association's director of advocacy.
Others agree. "If wirehouse lawyers are having
trouble interpreting the rule, how does anyone expect ordinary
investors to do so?" asks FPA president-elect Dan Moisand.
New Designation Focuses On Planning For Seniors
The America College has introduced a new designation
that focuses on the financial planning needs of senior citizens.
Successful completion of the five-course program
leads to the Chartered Advisor in Senior Living (CASL) designation.
The topics covered in the program include sources of
retirement income, determining retirement needs, portfolio management
for older clients, pension distribution planning, housing issues and
special issues in estate planning and charitable giving.
The program also focuses on lifestyle issues that
impact senior citizens, and includes practical case studies.
"Recent studies indicate that Americans are deeply
concerned about not having saved enough for retirement and potentially
outliving their financial resources," says Larry Barton, president and
CEO of The American College. "This course will provide the essential
knowledge financial advisors need to help older clients achieve
financial security and maximize the effectiveness of their savings."
New Survey Studies Broker Attitudes
Flexible and competitive compensation, marketing
support and professional development programs are the most important
ingredients to satisfying brokers, according to a new survey.
The survey by Fidelity Investments' National
Financial subsidiary-the first in what it says will be an annual Broker
Sentiment Index-found brokers to have an average satisfaction of 5.4 on
a scale of 1 to 7.
That equates to "quite satisfied," according to the
survey, which polled more than 700 investment professionals from a
random sample of regional, bank, insurance, independent and wirehouse
firms.
In terms of bottom-line performance, brokers are
somewhat optimistic, with an average expectation of a 7.2% on the
S&P 500 over the next year, according to the survey.
"We are encouraged that brokers say they are quite
satisfied with their careers, especially given all that they have been
through in the past decade, and that the vast majority are likely to
remain with their current firms for the next 12 months," Norman R.
Malo, president and CEO of National Financial, says in a prepared
statement. "Brokers are resilient-evolving to meet new challenges,
while maintaining their focus on meeting the financial needs of their
clients."
The survey found that 78% of brokers are mostly to
fully satisfied with their career choice and that 69% would recommend a
brokerage career to their children. Seventy-one percent say that
"helping clients achieve their goals" is what they like most about
their careers.
The survey also found that brokers are generally
happy with their employers, with 80% saying they are not likely or not
at all likely to switch firms. They also say they want flexible and
competitive compensation, marketing support and professional
development programs-three things which the survey found to be key in
both broker retention and overall career satisfaction.
The survey also found that:
Brokers at regional firms are the most satisfied, while those at banks are least satisfied.
Brokers managing more than $10 million in assets are more satisfied than those with less than $10 million.
Brokers working at firms with 250 to 499
registered reps are more satisfied than those working at smaller or
larger firms.
Brokers 55 and older are more satisfied than their younger colleagues.
Schwab Enhancing Portfolio Management
Schwab Performance Technologies is releasing
enhancements to its portfolio management system, PortfolioCenter, and
to PortfolioCenter Relationship Manager, its contact management and
workflow system.
PortfolioCenter Relationship Manager, which is
already available to new and existing customers, includes a number of
enhancements. These include better search capabilities for incoming and
outgoing e-mail, enhanced navigation, and filtering of action lists.
The new version also provides seamless integration with Schwab
Institutional's Web Forms, so that information entered into
PortfolioCenter Relationship Manager can be used to populate the forms.
Integration with Quik! Forms Library, a third-party software program,
enables automated form filling capabilities for more than 100
broker-dealers.
An upgrade to PortfolioCenter, the successor to the
popular Centerpiece program, is in beta testing and scheduled for
release this month. The major improvement is an enhanced Export Wizard.
Previously, when Schwab advisors ran rebalancing reports in
PortfolioCenter, they had to key in the trades manually. The new wizard
automates this process by allowing the advisor to upload the trades
directly to Schwab's Web trading platform.
In addition, the new version includes supplementary
data points that have been requested by third-party software providers.
By providing these extra data points, PortfolioCenter should more
easily integrate with these programs.
Growth Stocks Poised To Perform?
The growth sector may finally be on the verge of an
upswing after lagging behind value stocks for the better part of five
years, according to a new report.
The report by UBS Wealth Management USA says the
growth sector is in a position to outperform value, partly because
financials-one of value's key components-are due to underperform
because of the current yield curve. The report notes that financials
make up 36% of the Russell 1000 Value Index and only 6% of the Russell
1000 Growth Index. The authors of the study predict growth will
modestly outperform value over the next year.
"Historically, a flat yield curve has proven to be
good breeding ground for the relative outperformance of growth," says
Jeremy Zirin, a senior equity strategist for UBS Wealth Management USA.