Advisers move to fee-based ahead of fiduciary rewrite

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

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

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

Mr. Johnston said that his firm’s 18,000 advisers 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 pickup in the move to an advisory platform,” he 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,” he said.

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

‘THE SIMPLEST THING’

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.

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

A DOUBLE IN COST

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 SEC has said that it will turn to that task sometime after the first anniversary of Dodd-Frank, which will occur Thursday.

SIFMA conference participants anticipate that the SEC 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 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.

E-mail Mark Schoeff Jr. at [email protected].