But a new study of fee-based advice could bring more regulation in its wake. Yesterday the Securities and Exchange Commission (SEC) decided not to hold fee-based brokers to the same fiduciary standards as financial advisors. But today's decision might be a prelude to more regulatory probing into practical points of distinction between brokers and independent advisors, say industry observers. 

Under the new ruling, a brokerage "providing non-discretionary advice that is solely incidental to its brokerage services is excepted from the Invest Advisers Act [of 1940] regardless of whether it charges an asset-based or fixed fee" as opposed to commissions.

Some independent advisors had urged the SEC to overturn its 1999 "Merrill rule." That exempted fee-based brokers from having to register as financial advisors on the grounds that their advice to clients is "incidental" to the brokerage services they provide. Independent advisors want brokers "especially those in wirehouse consulting programs" held to the same fiduciary standards they themselves have to adhere to under the 1940 Act.

"You must deny this 'Merrill rule' exception," Howard Erman, an independent advisor with Erman Retirement Advisory in Cypress, Calif., writes in a 23 March comment letter on the SEC's January re-proposal of its 1999 ruling. "[Registered representatives] and [broker-dealers] that charge asset based fees appear to the public like they're financial planners. No amount of disclosure changes the appearance."

In fact though, other than state that "a broker-dealer providing discretionary advice would be deemed to be an investment adviser under the [1940 Act]," the SEC did little more than change the disclosure requirements for brokerage advisors who hold themselves out as consultants. Under the new ruling, brokers will have to give clients a disclaimer that says, pretty plainly, that the account in question is "a brokerage account, not an advisory account."

David Tittsworth, executive director of the Investment Counsel Association of America (ICAA), a Washington, D.C.-based association for registered investment advisors, wonders how much good that will do. He points to a focus-group report included in the comments that "shows massive confusion among consumers about the various [financial service] designations." In other words, many investors don't know the difference between an advisor and a broker in any case.

In addition to pulling for clearer disclosure, the ICAA also wanted "more meat put on the term 'solely incidental,'" says Tittsworth.

David Certner, director of federal affairs for the American Association of Retired Persons, agrees. "The Commission's characterization of 'solely incidental' advisory services in the re-proposal with terms such as 'in connection with' and 'reasonably related to' the brokerage business expands the scope and level of advisory services that would be considered incidental," he writes in his 9 March comment letter. "For example, it is hard to imagine how financial planning - that by definition is selling advice that may relate to investments, but also may encompass other financial issues - could not be considered to be 'in connection with'or 'reasonably related to' a broker's business."

But Stephen Winks, publisher of the Richmond, Va.-based newsletter Senior Consultant, thinks the new disclosure could mark a turning point in the wealth advisory business. "This simple decision on the part of the SEC has the potential to change everything," he says. "It could shift the view from products to processes."

In Winks' view, consumers won't miss the meaning of the new disclosure. "Then they'll start asking, "Well, if you're not giving me real advice, how are you adding value?" And that, he adds, could lead to a reduction in the number of brokerage-affiliated practitioners similar to the sharp drop that hit the U.K. business after stringent fiduciary disclosure went into effect in the mid 1990s.

In fact, the SEC signaled that it intends to continue studying the way brokers dispense advice. In the course of issuing its new ruling yesterday, SEC chairman William Donaldson directed his staff to undertake a comprehensive study on the precise points of distinction between brokers and 1940 Act advisors.

To the ICAA's Tittsworth, that study could be a prelude to legislation that might make it harder for some brokerage-based private-client consultants to conduct business as usual. -FWR