"Honesty is the best policy. If I lose mine honor, I lose myself." Shakespeare (1564-1616)
An article in The Wall Street Journal (WSJ) on May 17, 2007, titled, "SEC Decision Forces Investors To Make Choice" shines a light on a problem area for the investment community that, in my opinion, has fostered a disease resulting in many potentially fatal symptoms for the individual investor. Fortunately, this "disease" may be on its way to being cured...
Here's an excerpt from the article:
The Securities and Exchange Commission said Monday it would not appeal a recent federal court ruling that sharply curtailed fee-based brokerage accounts, which allow brokers to offer fee-based services to their clients, including some advice, without being registered as investment advisers. The accounts, as such firms as Merrill Lynch & Co., Morgan Stanley and UBS AG, hold some $300 billion in assets.
Many brokerage firms are now scrambling to retain their clients who are currently enrolled in fee-based brokerage accounts, by offering to move them into alternative types of accounts and by minimizing the headaches of closing one account and opening another.
For some background, fee-based, also referred to as "fee-only," advisers must register as an adviser with the SEC or with their state where the adviser conducts its primary business. Registered Investment Advisers (RIAs) have a fiduciary standard of conduct or, to put it simply, a legal and ethical responsibility to serve the client's best interests above their own and without any bias to outside or "competing" interests. Obviously, this structure is the most client-centered and most beneficial to the individual investor. As investors began catching on to this several years ago, the big brokerage firms, which primarily generated revenue through commissions and the sale of "proprietary" investment products, smelled an opportunity to cash in on this movement. Their only problem was that the big brokerage firms were not "registered advisers" and did not want to carry the legal burden of fiduciary responsibility, which could invite lawsuits. Conveniently, in 1999, the "Merrill Lynch Rule" allowed big brokerage firms to open fee-based accounts without registering as advisers and, therefore, bypassing the fiduciary standard of conduct and the legal and ethical responsibility attached to it. In other words, the big brokerage firms were able to "have their cake and eat it too." The new SEC ruling, as reported in WSJ, in my view, rights a wrong that can only be beneficial to individual investors in the long-run...
For full disclosure, I am the President and owner of a fee-only registered investment advisory firm in the Charleston, SC area. I've witnessed first hand brokerage firms shifting to a fee-based model and placing their clients' assets in so-called "wrap accounts" but their clients do not realize that they could have received the same service (or lack thereof) for a lower cost by staying with the traditional "commissioned-based" model, which also has its flaws. Consider the typical long-term, "buy and hold" investor who likely only needs a few investment changes per year. Obviously, a small hand full of commissions does not generate much revenue for the broker does it? The broker convinces the client to move to the new fee-based wrap account and, presto, an increased revenue stream for the broker! What's more, the broker doesn't need to register as an adviser or worry about the clients suing them for poor investment decisions because there is no fiduciary standard to worry about!
Not any more...
Investors need to pay special attention to how their advisers are paid and to what their responsibilities are. Without the assurance that the adviser is registered and the fiduciary level of responsibility exists, then the investor's dollars are at risk, no matter how knowledgeable or trustworthy the adviser may appear on the surface.
You can view other posts on my preachings on the importance of fiduciary responsibility by clicking here but I'll close this post with a fresh reminder of recent story close to home for me: Investors in the Charleston, SC area and around the country learned the fiduciary lesson the hard way recently in the case of Al Parish, a flamboyant local economics professor at Charleston Southern University (CSU) who has been indicted on 10 counts of fraud for lying to investors about their returns and how their money was invested. Potentially, hundreds of millions of investors' dollars are lost while Mr. Parish faces up to 250 years in federal prison. Did I mention that he was NOT registered as an adviser with the SEC or the state of South Carolina?
I rest my case...
TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston. ACI specializes in retirement, investments, and comprehensive financial planning.
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