Your Broker’s Interest May Not Be Yours

Merrill Rule Caveat Emptor – Your Broker’s Interest May Not Be Yours

January 31, 2006, a new Securities and Exchange Commission (SEC) ruling went into effect allowing broker-dealer’s to further confuse the public regarding objective investment advice. The measure that was approved in 2005 was initiated by the broker-dealer Merrill Lynch, hence the nickname of the “Merrill” Rule. Other broker-dealers quickly joined the rally for the exception that allows broker-dealers to avoid registration under the more stringent Investment Advisors Act of 1940. Broker-dealers have been migrating toward the appearance of Register Investment Advisors for some time. The challenge for them has been that they have not wanted to be held to the higher standards required in providing objective, “fiduciary” investment advice.

Interestingly, the ruling turned out to be somewhat of a defeat to the broker-dealer objectives. Though the exception was granted, they must disclose that their “interests may not always be the same as the customer’s.” This is only somewhat of a defeat since many investors will never notice the disclosure. Harold Evensky, a founding National Council of Financial Fiduciaries (NCFF) board member noted, “This new disclosure rule is a vital step towards reinforcing the sharp historic and legal difference between a SEC registered investment adviser and a NASD registered broker. The key difference is not compensation or the number of regulations in place. It’s much more. A broker and an adviser have fundamentally different responsibilities and jobs, based in law. Brokers owe loyalty to their firm, and their job is selling investment products and executing transactions. An investment adviser, on the other hand, provides advice and, by law, must put his client’s interests first. He owes his loyalty to his clients.” Unfortunately, most of the investing public has no idea that there is a difference in a broker-dealer and a registered investment advisor.

Broker-dealers further try to confuse the investing public through their marketing indicating they are providing “total” perspectives in their advisement. Even more confusing to the public are broker-dealers who have dually Registered Investment Advisors and Registered Representatives. A client may receive “objective,” fiduciary advice for the creation of a plan, and then unsuspectingly be placed into non-fiduciary brokerage accounts allowing the broker-dealer to offload overpriced, undesirable investments that may be “suitable,” but not in the client’s best “interest!” According to Investment News, February 13, 2006, page 13, Merrill Lynch sent an internal message to its representatives that said, “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.” Andrew Stoltmann, a securities attorney for investors stated, “The fiduciary issue is crucial in arbitrations.” He went on to say, “Brokerage firms argue at [arbitration] hearings that their broker is nothing more than an order taker.” Unless you are certain of the capacity in which investment advice is given and “implemented,” we suggest you make sure that your “advisor” acknowledges fiduciary responsibility in writing!

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