Broker-fee ruling a plus for investor

Your Money

May 27, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Tribune Media Services

If you've been socking away money in a fee-based brokerage account, you may be one of about 1 million customers facing some changes in the coming months. For retirement savers, it represents a good opportunity to evaluate exactly what advice you're receiving as you accumulate a nest egg.

The Securities and Exchange Commission recently decided not to challenge a federal appellate court ruling that overturned an exemption to the Investment Advisers Act of 1940, which had allowed fee-based brokers (as opposed to those working solely on per-trade commissions) to provide advice without registering as advisers under the act.

Driven by the rise of ultra-low- cost trading, full-service brokerages developed fee-based accounts to provide value-added services and a flat trading fee instead of fighting ever-lower per-trade costs.

But when those value-added services and pay structure constitute an advisory role, advisers are required to register under the act. And that carries a higher "fiduciary" standard of client care, meaning they must put their clients' interest first, ahead of their own or their firm's. By contrast, brokers typically are required only to recommend investments that are "suitable" for a client.

For most of the last decade, an informal SEC exemption allowed brokers to provide advice in these fee-based accounts without registering under the act.

Since the court ruling, consumer advocates have trumpeted it as a move that will improve disclosure and the quality of advice customers receive.

"Customers who have money in fee-based accounts will be better off with a fiduciary," said Mercer Bullard, founder of Fund Democracy Inc. and an assistant law professor at the University of Mississippi.

SEC commissioners have said they will consider whether further rule-making or interpretations are necessary regarding the act and these accounts.

Industry officials are reading that as a crack in the door to salvage fee-based accounts largely as they stand today.

"This is an alternative pricing mechanism that saves customers billions of dollars" versus paying for every trade individually, said Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, a trade group that represents the financial industry.

And firms are split on whether they're taking action yet to move accounts or not.

Some aren't changing customer accounts yet, while others, including UBS Wealth Management and Charles Schwab & Co., have already begun notifying customers of potential changes or reworking accounts to fit the Investment Advisers Act framework.

Assuming no new developments in the ruling, firms will be required to comply in the coming months. Industry officials expect companies will meet with, call or send letters to clients informing them of the change, which will be into either transaction-oriented brokerage accounts or advisory accounts that carry the fiduciary responsibility.

Where does all that leave investors? Now may be as good a time as any to ask yourself what you're paying for when you ask for help investing money.

"When I was just getting started in the business `an experienced adviser' told me you can hurt clients in two ways: on purpose and by accident," said Cheryl Norman, a financial adviser in Independence, Ohio.

The accidental kind can happen when an adviser's strengths and credentials simply don't line up with an investor's, Norman said.

Meanwhile, many investors are so focused on short-term goals that they don't realize they need to talk to their advisers about long-term planning, she said.

So use the recent dispute over brokerage advice to ask your own investment firm, adviser, planner or broker on the details of your relationship:

Request a Form ADV, which investment advisers must fill out to register with the SEC. It spells out his or her compensation methods, including payments the adviser may receive from providers of investments sold to you.

If you don't know, ask whether your investment accounts would be subject to changes under the recent federal court ruling, Financial Planning Association v. SEC.

Even if they aren't affected, ask if your adviser is held to a fiduciary standard in providing the advice he or she gives.

If you came to your adviser for more short-term goals, ask what experience he or she has working on long-range retirement planning. Designations here often aren't necessarily as helpful as knowing whether your adviser routinely works on retirement plans.

If you're moving close to retirement, ask your adviser how often he or she builds income plans for people already in retirement. Is he or she licensed to sell insurance products, such as annuities? Will there be a separate charge for developing this income-producing strategy?

"Especially for long-term money, it's important to separate out what you're paying for advice versus what you're paying for product," said Mark Balasa, a financial planner with Balasa, Dinverno & Foltz in Itasca, Ill.

Have a retirement question? Write to, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, Ill. 60611.

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