Commentary: Brokers Aren't Advisers

To protect investors, the SEC must draw a clear line

Click on the individual-investor page of Merrill Lynch & Co.'s (MER ) Web site, and you'll be wooed with promises of soup-to-nuts financial advice. Rather than merely peddling stocks, Merrill's brokers offer "a relationship that provides you with a lifetime of solutions."

Sounds enticing -- and a lot like the service offered by independent financial advisers. But there's a crucial difference: Adviser have to meet higher standards designed to protect investors. Not all do, but the rules give investors more legal safeguards. While brokers must recommend investments that are "suitable" to your financial status and goals, advisers have a fiduciary duty to put your interests ahead of their firms'. And advisers can't sell you stock from their own accounts without prior consent, while brokers have to notify clients of such trades only after the fact.

The line between brokers and advisers was clear for decades: Brokers were paid commissions on stock trade while advisers earned their money through fees. But in 1999, the Securities & Exchange Commission blurred the line. In a proposed rule that was enforced but never formally adopted, it allowed brokers more leeway to sell advice for a fee without meeting the adviser standards. Now the Financial Planning Assn., which represents 28,000 advisers, is suing the SEC over the rule and demanding a level playing field.

How did we get into this tangle? By the 1990s big brokerage houses such as Merrill and Morgan Stanley (MWD ) found themselves squeezed between discount brokers, who undercut them on trades, and financial planners, who offered a full menu of investment advice. With commissions under pressure, the major houses shifted increasingly to fee-based accounts. In response, the SEC said in 1999 that brokers could offer advice for a fee without triggering the adviser rules if the advice was "solely incidental" to brokerage services and if the customer had ultimate authority over the account.

The SEC figured its proposal would help investors. Fee-based accounts give brokers less incentive to "churn" client accounts to generate commissions. Merrill, which calls its 14,000 brokers "financial advisors," pioneered the trend of packaging products with advice. And 1,100 of Merrill's "FAs" are certified financial planners. The firm has $237 billion in fee-based accounts, 18.5% of the $1.3 trillion in "private client" accounts.

Merrill says that investors have ample protection thanks to a welter of federal and state rules governing brokers. It also argues that financial planners are simply trying to protect their turf. Brokerage industry lawyers insist that the advice brokers give is limited to helping customers choose among financial products. Securities firms' marketing, however, suggests that advice itself is a core product. But they can't have it both ways -- and it's time for the SEC to make sure they don't.

By Amy Borrus

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