CHICAGO — In an effort to prevent top brokers from bolting, wirehouses quietly are backing down from their tough stance against allowing advisers to act as fiduciaries to employee retirement plans.
Wachovia Securities LLC in Richmond, Va.,
UBS Financial Services Inc. of New York and Smith Barney, the brokerage unit of New York-based
Citigroup Inc., all confirmed that they have begun permitting top reps to act as fiduciaries in 401(k) plans under certain circumstances.
Although industry sources say that some reps from Merrill Lynch & Co. Inc. also are being permitted to hold themselves out as fiduciaries, a spokesman for the New York-based brokerage giant declined to comment on the matter.
New York-based Morgan Stanley did not respond to requests for comment by press time.
For years, wirehouses have steadfastly refused to allow reps to call themselves fiduciaries, which binds them to putting an investor’s interests ahead of their own. Instead, they have insisted that reps operate under rules that require them to recommend only “suitable investments,” while adhering to certain disclosure and sales rules.
Raising the bar
With more registered investment advisers agreeing to act as fiduciaries, wirehouses are under increasing pressure from their reps to adhere to the higher standard of financial advice.
“The broker-dealers are feeling pressure from advisers to come up with something so they can mollify these advisers,” said Robert Unger, executive vice president of business development for ExpertPlan Inc. of East Windsor, N.J.
For about a decade, Smith Barney has had platforms where
it assumes the responsibilities of a fiduciary said Norm Nabhan, director of institutional services for the consulting group. More recently, however, it has begun allowing reps to act as fiduciaries outside those platforms — provided the rep has enough training and experience, he said.
“We definitely are being asked more and more often to accept [fiduciary] responsibility when we get hired by a public fund,” Mr. Nabhan added.
Although some wirehouses are allowing reps to act as fiduciaries, others are taking a wait-and-see approach, said Fred Barstein, chief executive of 401kExchange Inc. in Lake Worth, Fla.
“The only reason for their hesitancy is, they’re not sure what they’re doing yet,” he said. “Some of them are making requirements so stringent that very few people can do it.”
A rep from Wachovia, who asked not to be identified, said advisers may act as fiduciaries under controlled conditions.
“What we’re saying is, it’s all about process and documentation,” that rep said. “It’s not something the average retail broker does.”
He estimates that fewer than 10% of Wachovia’s reps are allowed to act as fiduciaries.
Wirehouses that promote the fact that their reps are allowed to act as fiduciaries probably would gain a competitive advantage over those that do not, said Donald B. Trone, president of the Center for Fiduciary Studies and chief executive of Fiduciary360, both in Sewickley, Pa.
“Right now, the competition is neck and neck, and nothing really enables one wirehouse to distance itself from another,” he said. “Coming out with a fiduciary platform would be a very good example of something that would enable one wirehouse to distance itself from rivals.”
While wirehouses are making slow and deliberate moves, smaller brokerage firms are embracing the fiduciary standard even more slowly, said Terry Lister, chief regulatory officer of Waddell & Reed Financial Inc. of Overland Park, Kan.
Indeed, his firm has yet to allow reps to hold themselves out as fiduciaries, he said.
However, two programs that would allow advisers to act as fiduciaries are in the works at Linsco Pri- vate Ledger Corp., said John MacGregor, senior vice president of retirement marketing for the San Diego- and Boston-based independent-contractor broker-dealer.
The company wants to allow its top advisers to act as fiduciaries to plan sponsors as well as to plan participants, he said.
“We’re looking at an accreditation program to allow our most experienced and accredited advisers to provide that service at the plan level,” Mr. MacGregor said. “I think this is pretty cutting edge.”
Deciding whether wirehouses or brokerages should allow their reps to be fiduciaries isn’t an easy decision, said Fred Reish, managing director of Reish Luftman Reicher & Cohen, a law firm in Los Angeles.
The U.S. Department of Labor recently released guidance for advisers who choose to offer investment advice to participants. Mr. Reish believes the guidance will make it more challenging for wirehouse reps to be considered fiduciaries to plan participants.
But Mr. Barstein says that many wirehouses are more interested in having their reps be fiduciaries to plan sponsors versus plan participants.
