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.