From the November 2007 issue of Investment Advisor • Subscribe!

November 1, 2007

Migration Time

Is repapering accounts for 202(a) the last straw for wirehouse reps?

Recent events in the broker/ dealer world may have set the stage for higher than usual firm-to-firm migration by representatives, some of whom have been dealing with repapering clients, either over to advisory accounts or to commission brokerage accounts, in order to comply by October 1 with the overturn of the so-called "Merrill Lynch rule." The Broker/Dealer Exemption Rule 202(a)(11)-1 exempted brokers from regulation as an investment advisor, even when the brokers were being paid fees for investment advice in fee-based brokerage accounts. Not only are advisors changing firms, but also many who do so are going over to the investment advisory side of the business.

"The volume of [r?(C)sum?(C)s we receive] increases in the fall, winter, and spring," says Bill Van Law, laughing because as senior VP of business development at Raymond James Financial Services, he's based at the company's headquarters in St. Petersburg, Florida. But it seems that interest from representatives from wirehouses has spiked. "Long term, most of the advisors that have joined our firm have come from the wirehouses," he says. "Starting in May, before the recent announced merger between AG Edwards and Wachovia," but after the B/D Exemption rule was vacated, "we saw an increase in the volume of our leads," from wirehouse reps. "It more than doubled the rate that we'd been running," according to Van Law, who cites B/D mergers combined with "tiering of interest rates, branch manager changes, haircutting, and any number of other things that just have frustrated advisors." Raymond James is in a unique position to catch wirehouse reps as they move: the firm is large enough to make wire reps comfortable and offers an array of ways to affiliate with the firm, from employee status all the way over to independent advisor, with several hybrid choices in between.

But does this have to do with the rollback of the B/D Exemption Rule? "I wouldn't say that it necessarily has created the issue. What it has done is created the urgency surrounding other issues that already existed. There were already frustrations," Van Law explains, "and then you have the Merrill Lynch or Rule 202 come in and these advisors, largely fee-based go: 'Gosh, I'm really not all that happy but it's a lot of work to move, so I wasn't doing anything.' Now this changes, and as a result of the firms being forced to eliminate fee-based brokerage; if they did a lot of this sort of business they were going to have to repaper a significant number of their accounts, so a lot of advisors said it forces them to stop and think: 'Well, if I'm going to have to go repaper a bunch of accounts, maybe I ought to repaper them at a different firm.'" Van Law knows well how advisors think; he was one with Merrill Lynch for 20 years, he notes. Instead of being the actual catalyst for a move, the ruling on the B/D exemption became, perhaps, the last straw.

Embracing the Fiduciary Role

Most of these advisors coming over to Raymond James will operate under the firm's corporate RIA, providing advisory services to clients, even though they could form their own RIA and still affiliate with that firm. That's an interesting switch as reps-turned-investment advisors when away from the wirehouses embrace the fiduciary responsibility that the advisory role mandates.

Merril Hirsh, a partner at the law firm Ross, Dixon & Bell, LLP, in Washington, D.C., represented the Financial Planning Association in the lawsuit that resulted in the March 30 U.S. Court of Appeals ruling that reversed the broker/dealer exemption rule. Hirsh personally "would like to see that broker/dealers who provide financial advice evolve into a professional [group] of advisors, not that they weren't professional before, but ones that assume the professional responsibility of putting their clients first."

Another point of view comes from advisor Chris Cooper, who runs Chris Cooper & Company, an RIA in Toledo, Ohio and San Diego, California. He farms out money management to five managers he's selected, and also sometimes works with clients' outside money managers. His fee-only model has brought both his expenses and, more importantly, his clients' expenses down, he says. In the case of clients, Cooper says the drop is "more than 100 basis points" from when he was a broker/dealer rep.

He also foresees a day when anyone dealing with the public about investing and finances will be a fiduciary. Cooper argues that independent B/Ds' days are numbered. Why? He sees B/Ds as middlemen "stuck with having to supervise and oversee reps, and [they] want revenue to do that," while "Schwab and TD Ameritrade--they don't have to supervise anybody so they have 100% of their money poured into their technology and customer service." While the upper end, $10 million to $25 million "family office" types of operations may thrive, retail--"that's obsolete; Charles Schwab blows that away."


E-mail Senior Editor Kathleen M. McBride at kmcbride@investmentadvisor.com.

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