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Industry Spotlight > Broker Dealers

Advantage: RIA

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I read an interesting article the other day pertaining to the recently overturned broker dealer rule. You see, I am currently in the process of creating a direct mail campaign to differentiate myself from the rest of the pack. As I review my main differences, the landscape is rapidly changing. First, a little background is in order.

Prior to the court’s ruling, a broker could offer fee-based brokerage accounts and was subject to NASD Conduct Rule 2310(a). This rule states that “in recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his security holdings and as to his financial situation and needs.” So the broker had only to believe that the recommendation was suitable based on the facts, “if any”. As I understand the rule, the responsibility falls to the broker. A fiduciary, on the other hand, must always place their client’s interests ahead of their own and must do whatever is necessary to assure this. Here, the responsibility is on the RIA. Prior to the rule change, there was a clear advantage to the RIA, at least from the client’s viewpoint, since RIAs are subject to the rules of a fiduciary, the highest standard in the industry. Now the lines are becoming blurred.

I am very curious to see how the large brokerage firms and banks will adapt. You see, to a large degree they are a sales-driven model while a fiduciary is an advice-driven model. Lately I’ve been reading about Smith Barney, UBS, Merrill, and the rest of the gang, and it appears that some are further down the path than others. Even if they arrive at their destination, I am somewhat skeptical about their ability to deliver completely objective advice. What if there’s an area of a client’s situation that needs attention but the large firm doesn’t address that area because they offer no products or services to fill the need? This whole thing could cause a new wave of consolidation as firms merge to become more of what the client needs. Plus, as long as there are shareholders to please, sales must be made and the brokers will still be subject to revenue quotas, even if it is unspoken. It seems to this writer that they will remain a sales-driven culture for the foreseeable future.

Once again, advantage, RIA.


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