BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
BUSINESSWEEK INVESTOR -- THE BARKER PORTFOLIO When Are Brokers More Than Brokers? Wall Street likes to call them advisers or consultants, but those are just names. You may need to do a little research to get at the truth Which precinct, Wall Street or Washington, puts the truth in greater danger is beyond me to say. Both agree it's fine for stockbrokers to hold themselves out as ''financial consultants'' (Merrill Lynch, Salomon Smith Barney) or ''financial advisers'' (Prudential, PaineWebber). The Street wants its brokers to seem more professional. Yet Washington isn't holding them to the higher standards for investment advisers. Why? It doesn't think brokers give much advice. This masquerade will be legitimized by a proposed rule expected to be adopted this year by the Securities & Exchange Commission. The rule is called ''Certain Broker-Dealers Deemed Not To Be Investment Advisers.'' I couldn't recommend worse reading for the beach. But if you pay anyone to help you invest, you'll want to tune in to what it tells us about brokers who call themselves advisers. Since 1940, securities law has viewed and regulated brokers and advisers differently. Brokers, the law assumes, aren't really in the business of giving advice. They exist to help investors make trades, and any stock tip or counsel they offer is supposed to be incidental--given without extra payment. By contrast, the law views advisers as getting paid mostly for the investment advice they give. That's why they have to make fuller disclosures of their conflicts of interest, such as how they might profit when you take their advice and invest. An adviser also owes clients a higher fiduciary duty: to put clients' interests first. BETTER AURA. Fast-forward to the present. Washington is finally waking up to Wall Street's longtime drive to deliver not just trades but truckloads of advice. It's the big full-service firms' way of shoring up business as discount brokers keep cutting trading commissions. This reached a crucial point last year when the brokers unveiled new account options, which let clients trade alone online for low, flat fees. For higher fees collected as a percentage of assets, clients can get fuller service, including help with stocks, bonds, funds, retirement plans, trusts, insurance, banking, mortgages, and more. On its face, that sort of service looks like a lot more than ''incidental'' brokerage advice. And these accounts now generate much bigger fees than the nominal $25 or $30 for an online trade. So regulators couldn't ignore the implication that brokers offering these accounts could be considered advisers. Yet the SEC also likes asset-based fee plans. Correctly, it thinks that they better align the interests of brokers and clients. Without the hunger for commissions, no broker need churn accounts or make high-pressure sales calls. That's why the SEC is bent on granting brokers an exemption from regulation as advisers. As the SEC sees these brokers, their advice remains incidental. ''They offer the same package of services. They're just priced differently,'' says SEC attorney Cynthia Fornelli. The new rule, she adds, will direct marketers to distinguish clearly between brokerage and advisory accounts. More truth in advertising can only help. Yet I doubt Wall Street will begin portraying its salespeople as simple brokers. Titles such as financial adviser ''create an aura of professionalism,'' says Securities Industry Assn. lawyer Michael Udoff. ''Brokers aren't just stock jockeys anymore. It's a more sophisticated process of taking into account all of the client's financial needs.'' Somewhere between Washington and Wall Street, truth lies bleeding. If you prefer to bypass discount firms and pay extra for a full-service broker, compare the cost of a brokerage account with an advisory account. Ask to see what the SEC calls Form ADV. It will detail how the adviser makes money and disclose any potential conflicts of interest. The truth is, a broker without an ADV is just a broker--by any name. Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711 By ROBERT BARKER _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					INTERACT E-Mail to Business Week Online

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