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Industry Spotlight > Broker Dealers

A Practitioner's View on the Merrill Rule

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Before we move on to portfolio management, let’s discuss some of the recent developments concerning the broker/dealer exemption rule, aka the Merrill Lynch rule. The rule stated that a broker/dealer providing advice that is solely incidental to its brokerage services would be exempt from the Investment Advisers Act of 1940 if it charges an asset based or fixed fee (rather than a commission, mark up, or mark down) for its services, providing it makes certain disclosures about its services. Since the court ruled against this exemption for B/Ds and the SEC has decided not to appeal the court’s ruling, it seems clear the landscape will soon be changing. This will certainly create a number of challenges for broker/dealers (mostly the wirehouse variety and not the independent B/D) and perhaps present an opportunity for RIAs.

First, will the B/Ds embrace the Advisers Act and allow their reps to become Investment Advisor Reps (IARs)? If so, their reps will be held to a fiduciary standard which is much higher than the suitability standard of the Securities and Exchange Act of 1934 under which they currently operate.

Broker/dealers devote a significant amount of their budget to compliance and oversight. Will they need to invest more to assure this higher standard is being adhered to by its brokers? Where will this additional investment come from? Will they reduce the payout to their reps to provide this? Will this higher standard increase their exposure to lawsuits? It’s very possible we’ll see an increase in rep departures from the large B/Ds, in my humble opinion.

As B/Ds search for answers, I believe there exists a significant opportunity for RIAs to capture market share. I believe clients will be better served when their advisors are held to the highest of standards. The real challenge for RIAs lies in the possibility that a large number of brokers may experience an epiphany and join our ranks. As Wayne Gretzky once said, “I skate to where the puck is going to be, not to where it has been.” Where will this trend lead? That’s the relevant question.


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