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Litigation Pending for Broker/Dealers Who Offer Fee-Based Accounts

There has been a lot of controversy lately surrounding how and who may provide investment advice. The Securities and Exchange Commission (SEC) promulgated a rule that exempted fee-based brokers from registering as “registered investment advisors” (i.e., the Merrill Lynch rule). The Financial Planning Association has subsequently filed a lawsuit against the SEC challenging the rule. So what is all of the fuss about?The fuss is about whether broker/dealers (i.e., investment advisors who charge commissions) who also offer fee-based accounts can sidestep the fiduciary requirements imposed by the Investment Advisors Act of 1940. The current SEC rule says that broker/dealers can sidestep the rules when offering fee-based accounts.

So what is a fiduciary and why should anyone care? A fiduciary is one that is obligated by law to put the client’s interest above their own, and if they violiate this duty they can be held legally accountable. A non-fiduciary is not under an obligation, pursuant to SEC rules, to put the client’s interest above their own. As applied to investing consumers this means that broker/dealers can sell fee-based investments and not be held to the fiduciary standard; whereas, registered investment advisors who only work on a fee-basis are held to the fiduciary standard (note: these advsiors only work on a fee-basis, meaning that they never earn commissions).

Consumers should care because the SEC rule muddies the waters making it very difficult for consumers to discern whether their advisor can be held to a fiduciary standard. If a consumer is talking with a financial advisor, he or she should know whether the advisor can act in the advisors own interest as that may impact whether the consumer wants to follow the advisor’s advice.

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