SEC DECISION CHANGES
THE NATURE OF INVESTMENT ADVICE
On April 12, 2005, the Securities and
Exchange Commission (SEC) published a rule (Certain Broker-Dealers Deemed Not To Be Investment Advisors) that allows
brokers to offer fee-based brokerage accounts (and advice) without being required to register as investment advisors
under the Investment Advisers Act of 1940. The decision has been referred to in the media as the “Merrill Lynch
Rule.”
A number of consumer organizations opposed the adoption of the Merrill Lynch rule --believing that this rule creates
more confusion than clarity for investors. These included the Consumer Federation of America, the American Institute
of CPAs, and the Financial Planning Association (FPA). Currently the FPA is pursuing a lawsuit against the decision.
Because we feel that it is important for every investor to understand the difference between registered investment
advisors (such as Wealth Analytics) and brokers who offer fee-based accounts, we have written a White Paper on
the significance of this new rule. For those of you who would like a copy of the White Paper, please contact Austin
Gallaher at (858) 794-2100. |
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CAVEAT EMPTOR:
ASKING THE RIGHT QUESTIONS
We believe that consumers are best served
when they receive investment advice in the context of good financial planning. We also believe that it is important
for consumers to understand the difference between registered investment advisors and brokers who offer fee-based
services.
Before commencing a relationship with a financial advisor, we encourage consumers to ask the following questions:
· Do you provide financial planning
advice?
(Best Answer: Yes, I am
committed to providing both financial
planning and investment advice.)
· Do you provide fee-based advice as
a
Registered Investment Advisor, or
are
you operating under the
exemption
for brokers allowed by
the
SEC? (Best Answer: Yes, I am a
Registered Investment Advisor.)
· Do you consider yourself to be
fiduciary?
(Best Answer: Yes I consider
myself to be a fiduciary on your behalf.)
We believe that asking these questions can help you find the right advice. |
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A SHORT HISTORY OF THE NEW RULE
During the early part of the Twentieth
Century brokers charged commissions for selling stocks
and did not offer on-going "investment advice." However, by the 1930s some brokerage houses
had established special departments where customers could get general investment advice on
an on-going basis. The brokers who provided this more extensive type of investment advice were known as "the
customers' men." This phrase was meant to signify that these brokers worked
for the customer instead of the brokerage house. In 1940 Congress passed new legislation to
regulate this type of advice.
The Investment Advisers Act of 1940 gave rise to two distinct classes of financial advisors: 1) investment advisors,
and 2) brokers. Investment advisors were regulated as fiduciaries
and were allowed to charge a fee for the investment advice
they offered clients. Brokers were regulated as salespeople (receiving transaction based commissions) and were
prohibited from giving more than "incidental" advice. When
financial planning arrived on the scene during the 1970s,
the SEC deemed financial planners to be investment advisors (because they charged a fee for their advice).
As the world of financial services evolved during the 1980s consumers began to show more and more interest in
fee-based investment management accounts (as opposed to commission-based accounts). Brokerage houses responded
to this interest by creating fee-based brokerage accounts. However, this new type of account raised two perplexing
regulatory questions: Can brokers charge fees without having
to register as investment advisors? How much advice can brokers give before they must be
regulated as investment advisors?
The new SEC rule allows brokers to provide fee-based brokerage accounts and advice (without needing to become registered
investment advisors) so long as they meet certain requirements.
Three of these requirements are:
1. Brokers must clearly explain that they are providing brokerage accounts,
not investment advisory accounts.
2. They can provide only limited or "incidental" investment advice.
3. They cannot provide financial plans or financial planning advice.
Nor can they hold themselves out as financial
planners.
If you are looking for financial planning advice, you will need to work with an advisor who is registered as a
Registered Investment Advisor (RIA). |
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