From the September 2005 issue of Investment Advisor • Subscribe!

Sorry, Bob. They Still Don't Get It

I enthusiastically endorse the fee-only concept, and share most of Bob Clark's observations about the National Association of Personal Financial Advisors (June 2005, "Rebels Without A Cause"). We've been a fee-only investment advisor since 1998, and I've written several articles and a book about the subject. But we don't hold ourselves out as comprehensive financial planners and--for that reason--we've not joined NAPFA.

One place where I do disagree with Bob is on the universal acceptance of fee-only investing. He writes, "The press gets it, the public gets it, Wall Street gets it, even other advisors get it." Frankly, I think they get it as a competitive point, but not as a superior platform for providing service.

To muddy up the waters, brokers have hijacked the language ("fee-based") and some of the trappings (wrap accounts, financial plans, and consulting/advisory services), but not the true nature of fiduciary investing. When the SEC voted to permanently adopt the Merrill Lynch rule, it allowed traditional brokers to escape consumer protections offered under registration rules so long as their advice is "solely incidental" to traditional brokerage services.

Traditional brokerage firms exerted considerable pressure on the SEC to retain the Merrill exemption because they didn't want the expense, legal compliance, or direct responsibility to clients that comes with formal registration. In other words, they wanted to look like and advertise themselves as objective planners without the registration bother and expense (and being registered, I can attest to the burden of both!).

A case in point: Today's local newspaper carried a sizable brokerage ad entitled "Comprehensive Wealth Management" that proposed a menu of services including financial planning and trust and estate planning. Clearly, there are good folks who work for brokerage firms, but anybody holding himself or herself out to provide complex financial planning and advisory services ought to be fully regulated as an advisor. I'm certain that the Bar Association has an opinion about "incidental" trust and estate planning!

Truthfully, there is no such thing as incidental financial advice, just as there is no such thing as incidental surgery or incidental auto transmission repair. Either financial planning is being done properly and in the sole interests of the client (as in fee-only) or it's just being used as a ploy to sell investment products. It really is that simple.

It is clear that under the SEC ruling, certain financial professionals are not going to be held to a fiduciary standard. It is also clear that the SEC feels that much advice given by these brokers is "solely incidental" to their more primary function of making securities transactions or selling wrap accounts. That's a sad commentary on our entire industry.

This conclusion is inescapable. A solid line has been drawn in the sand, and two distinct classes of financial professionals now exist: Those who accept fiduciary responsibility and those who hide behind an exemption. It's hard for me to believe that any knowing consumer would choose the latter.

Dan Danford, MBA, CRSP

Family Investment Center

St. Joseph, Missouri

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