Land of the fee: Advisers seen switching revenue model ahead of fiduciary rewrite

MSSB big Charles Johnston says move to fee-based model has been ongoing for six months; dubbed ‘safe harbor' by RBC's Taft

Jul 13, 2011 @ 3:51 pm

By Mark Schoeff Jr.

With one federal agency in the midst of writing a fiduciary-duty rule and another about to embark on one, many advisers are shifting their business to fee-based accounts, according to an industry executive.

Charles Johnston, vice chairman of Morgan Stanley Smith Barney, says the switch is no doubt due to the Securities and Exchange Commission's plan to propose a universal fiduciary standard for retail investment advice.

“It's an interesting trend we've noticed in the last six months,” Mr. Johnston said at the Securities Industry and Financial Markets Association regulatory summit in New York on Wednesday.

Mr. Johnston said that his firm's 18,000 advisers, who handle brokerage, advisory and retirement accounts, foresee challenges related to new rules for the brokerage business and are opting for a more stable regulatory environment on the advisory side.

“We have seen a pick up in the move to an advisory platform,” Mr. Johnston told reporters after speaking on a panel with other financial executives. “They're doing that in anticipation [that] the world's going to change on the brokerage side.”

Mr. Johnston didn't have specific numbers on the trend, noting that “it's not a wide enough sample” to determine that the pending fiduciary rules are the triggering the moves.

“There may be other reasons why it's happening,” Mr. Johnston said.

In addition to potential SEC action, the Department of Labor has proposed a regulation to expand the definition of fiduciary for advice about retirement plans.

All the regulatory activity swirling around fiduciary duty is making the traditional standard laid out by the Investment Advisers Act of 1940 — that an adviser must act in a client's best interests — more appealing, according to another financial executive who addressed the SIFMA conference.

“The simplest thing to do is to migrate to a fee-based account,” said John Taft, chief executive of RBC Wealth Management (U.S.) and chairman of the SIFMA board. “That's the safe harbor.”

The drawback, Mr. Taft asserts, is that small investors who can't afford adviser fees will be harmed.

He cited industry statistics indicating that the cost of advice could double for those with a modest amount of money invested, such as holders of individual retirement accounts.

“That is a perverse result,” Mr. Taft said.

Under the Dodd-Frank law, the SEC has the authority to write a universal fiduciary-duty rule. The agency has said it will turn to that task sometime after the first anniversary of Dodd-Frank, which will occur July 21. SIFMA conference participants anticipate the agency will move ahead in the fall.

In January, it delivered to Congress a study, also mandated by Dodd-Frank, which found that such a regulation would provide better protection for investors who are confused about the differing standards investment advisers and broker-dealers must meet. The latter are held to a less stringent “suitability” rule.

SIFMA is imploring the SEC not to foist the Investment Advisers Act on broker-dealers, maintaining that doing so would force them to change their business models and would price small consumers out of the advice market. “Rules that don't exist today need to be written to tell us how to apply the fiduciary standard to brokerage activities,” Mr. Taft said.

Among the broker roles that would have to be addressed: principal trading and the issuing of new securities.

Mr. Johnston is confident that the SEC will not try to impose the Investment Advisers Act on everyone providing retail investment advice.

“We're moving away from that,” he said. “There will be much more consent and disclosure around traditional brokerage activities.”

Disclosure requirements will be an important part of any new SEC fiduciary rule because it will be impossible to completely eliminate conflicts of interest.

“We have to focus on how we manage our conflicts,” Mr. Johnston said.

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