Subject: File No. S7-25-99
From: Rick Brooks
February 1, 2005
As a representative of a Registered Invesmtent Adviser, a CFP(R) Certificant and Chartered Financial Analyst (CFA), I cannot imagine what the Commission has been thinking with this rule. As noted in the background section of the proposed rule, the Investment Advisers Act excepts from the definition a broker or dealer "whose performance of [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor."
The Commission has already made the case that a certain portion of the fees being charged represent fees for advice. In fact, if one reviews the total fee structure of a typical "wrap" account, it is fairly easy to see that the vast majority of the fee is for advice, not trading and execution. A client who is paying a wrapped fee for a separate account program might be paying only 30 basis points of the 180-300 basis point fee for trading and execution. The rest is for other services, including asset allocation, reporting, asset management, etc. This is hardly "incidental tot he conduct of his business as a broker or dealer." In a situation where such a small percentage of the fees being paid are for trading and execution, it must be clear that the advice here is central to the service, and not "incidental."
A cursory review of just the websites of several broker dealers will demonstrate conclusively that their brokerage services are incidental to the advice that they provide to their retail clients, and in more areas than simply wrap programs. At least, that is the sense that one receives from the websites of Raymond James, Merrill Lynch and others.
It is, in fact, difficult to find in their advertising and brochure materials any discussion of their function as a broker or dealer. In fact, most of the discussion is about providing advice, counsel and assistance in the financial lives of their clients, to meet their long-term investment goals, etc.
In light of countless recent scandals surrounding the failure of brokerage firms to disclose conflicts of interest, pay-to-play arrangements and other eggregiuos violations of client trust and fiduciary care UNDER CURRENTLY EXISTING REGULATIONS, it is inconceivable that the commission would seriously consider EXEMPTING broker dealers from the more stringent regulation and higher standards of care and practice required of Investment Advisers.
Clearly, the major brokerage firms are attempting, with significant success, to market themselves as advisors, not salespeople. These efforts are relentless and ongoing across all media. They are offering services which focus first on the delivery of investment and financial advice, rather than implementation of that advice with investment products. It is certainly a better way to do busines, and a better way to treat your clients.
It is not, however, advisory services which are incidental to the conduct of business as a broker or dealer.
Another point in the background of the rule suggested that the commission was concerned that forcing the broker/dealers to register as advisers in order to market advisory based services would limit the development of these services.
I would submit that while this arguement is frequently used to deter regulatory scrutiny, it has almost never been born out in practice. If the brokerage firms beleive that there is money to be made in these advisory programs, and this is clearly the case, they will adjust their businesses accordingly to offer these services under the regulatory structure that exists. Their current lobbying for this proposed rule is nothing less than an attempt to tilt the regulations in their favor.
Besides, would it really be the end of the world if brokers who wanted to act as adivsors were forced to register as such? It would be decidedly unfair to allow brokerage firms to market themselves as adhering to a higher standard to which they are not being held, but to which the rest of us are.
Rick Brooks, CFP, CFA
San Diego, CA