In Practice June 3, 2007
New Playing Field for Advice
With the so-called Merrill Lynch Rule a thing of the past, some advisers will need to clarify their role, though it's not likely to broadly impact the managed account environment.
Reported by Alison Cooke
The appellate court overturning the so-called Merrill Rule has implications in both the short-term and long-term. In the short-term, Cerulli asserts, broker/ dealer firms will have to create a plan for addressing their fee-based brokerage accounts and ensuring compliance; long-term “the industry needs to rally together to educate investors regarding the spectrum of advice in order to meet both their expectations and needs in a responsible manner.”
According to Cerulli, the overturning of Rule 202 will be a generally positive development for the industry because it clarifies the role of advice and offers protections for investors. However, Cerulli says it is cautious because “regulation always carries the downside risk that in its quest to do right by investors, the additional burdens placed on firms get in the way of their objective to successfully advise investors.”
Therefore, in this new environment, the firm says, “the business practice of investment and financial advice will prevail, and the firms that will win will be those that compete with the most ethically driven, comprehensively developed, and concisely communicated investor-benefiting solutions.”
Managed Accounts
Although there will be many challenges in coping with the new regulatory environment, Cerulli says that the only segment of the managed account platforms that will be affected is that of fee- based brokerage, nonadvisory managed accounts in which clients are charged a fee in lieu of commissions, and cannot be charged a separate fee for advice. These accounts are only 16% of all managed account programs.
Previously, under Rule 202, advisers overseeing fee-based brokerage accounts did not have to assume fiduciary responsibility. However, as a result of the appellate court ruling, broker/dealers will have to assume fiduciary responsibility for the fee-based accounts. In order to cope with the ruling, B/D firms will need to have a plan in place to cope with these changes, Cerulli asserts, although the firm does not believe it is a “roadblock that will stop the evolution of managed accounts platforms, forcing a return to the commission-based, product-focused environment that reigned in the waning years of the last millennium.”
“The new ruling will propel B/D firms to immediately begin working with their advisors and their clients to convert [fee-based accounts] back to a commission-based structure where deemed appropriate,” Cerulli says.
Advisers at the B/D will have two options to choose from in addressing these accounts – “they will either have to convert these accounts back to a commission- based arrangement or reorganize these accounts to adopt advisory agreements,” the research says. Further, advisers and broker/dealers will need to communicate the changes to their clients, which will lead to added disclosures and paperwork.