IRVINE, Calif. - Registered representatives at wirehouses face a host of procedures and restrictions in reaction to the Securities and Exchange Commission's so-called Merrill Lynch rule, which went into effect Jan. 31.
Among other things, brokers at some firms are being told not to use outside financial planning software.
In a recent e-mail message, Morgan Stanley of New York told reps that they should no longer use any outside software for planning purposes. Brokers were told they should transition client data to the firm's Financial Outlook program this month.
Outside software isn't always "configured to automatically satisfy our advisory obligations," and it may not "provide the infrastructure you need to keep you in compliance with the new rule," according to the e-mail message.
Supervision at issue
Only in rare instances will brokers be able to use other programs, the firm said.
Morgan Stanley's new policies "ensure that financial planning
is carried out in a legally compliant manner," said a company spokeswoman.
New York-based UBS Financial Services Inc. also has "terminated any adviser's ability to use any third-party [planning] software," said a firm rep who is based on the West Coast and who asked not to be identified. "They can't vouch for algorithms" in outside software, the broker said. Peter Casey, spokesman at UBS, declined to comment on the software issue.
The issue with software is supervision, said Nancy Lininger, a Camarillo, Calif.-based compliance consultant. Brokers at the major firms do financial planning through a registered investment advisory unit, she said, and therefore these firms need to standardize the financial planning process.
The new SEC rule regulates financial planning under the fiduciary standards of the Investment Advisers Act of 1940, while allowing fee-based brokerage accounts to be governed under the Securities Exchange Act of 1934, which has a lower sales practice standard.
Brokers doing financial planning now must be registered as investment adviser representatives. Before the rule, stockbrokers could claim financial planning was just an incidental part of their brokerage business.
The SEC now defines financial planning as analyzing a wide spectrum of financial needs such as insurance, savings, tax and estate planning, as well as investments, according to a December commission interpretation.
Investment analysis and other tools, which the SEC distinguishes from full financial planning, still can be done under broker rules.
In response to the rule, firms are instructing brokers on how to distinguish between full financial plans and more limited needs-analysis tools.
In an internal message to reps last month, Merrill said that the act of creating and delivering a financial plan is an advisory service but that implementing a plan is done in the firm's brokerage capacity.
"Implementing plans is not giving advice," said a rep at the firm in the Southwest, who asked not to be identified.
Brokers at Wachovia Securities LLC in Richmond, Va., said that the firm's Envision analysis tool clearly states that it isn't a financial plan and it doesn't include estate or insurance planning.The firm didn't respond to questions.
Meanwhile, brokerage firms have had to revamp many of their financial planning documents and add new disclosures.
Effective Jan. 31, for example, Merrill required clients to sign off on its financial plan documents, which now disclose that the plans are advisory services.
Distributing a disclaimer
UBS reps have to first send clients a "49-page disclaimer before interacting with the client" on a financial plan, said a UBS broker in the Southwest who asked not to be identified. Smith Barney of New York requires new disclosures for financial plans, as well as for separate analyses of retirement, estate and net worth if those planning modules are sent within six months of each other, said a spokesman, Alexander Samuelson.
Business cards, stationery and marketing materials also are being updated with new titles and disclosures, brokers said. Some firms also have required training.
Although the industry fought the rule, firms now are saying the higher standards and extra disclosures for financial planning are a good thing.
The rule "advances our goal of moving the business increasingly toward an advisory, fee-based model," Mr. Samuelson said.