Who Wants “Incidental” Financial Advice?
On April 6, 2005, the SEC adopted what is known in the financial industry as the “Merrill Lynch Rule.” While it has not been widely publicized, this odd rule is something investors should clearly understand. It allows brokers at firms such as Merrill Lynch (where they’re called “Financial Consultants”), Smith Barney, Dain Rauscher, etc., to escape the protections offered to the public under the Registered Investment Advisor Act so long as their investment advice is “solely incidental” to their brokerage services.
Why would you engage a “financial consultant” for “incidental advice?”
If you ask anybody why they do business with such firms, they will likely tell you it’s because they feel comfortable that they will get competent advice at these brand name companies. The fact is, we do business with people, not institutions – and it’s the people that we trust. To be sure, there are good competent folks working for these firms. Nonetheless, common sense says that anybody who holds himself or herself out as providing investment advice ought to be regulated as an investment advisor, just as those who promote themselves as providing medical advice ought to be regulated as a medical doctors.
There is no such thing as “incidental financial planning” – just as there is no such thing as “incidental surgery” or “incidental litigation.” “Incidental Financial Planning” is incomplete financial planning and it often does more harm than good. Either financial planning is being done properly and in the best interest of the client or products are just being peddled by a salesperson and it’s “buyer beware.”
It is disappointing that the SEC refused to embrace what seems like clear logic. The Merrill Lynch Rule condones the practice of investment brokers holding themselves out as competent financial advisors while escaping the higher standard of acting as a fiduciary. Apparently, the SEC’s position is that much of the “advice” that is given by brokers is “solely incidental” to their primary function as an order taker for securities transactions, even though they advertise themselves as “financial advisors,” “financial consultants,” “wealth advisors,” etc. Does this ruling foster “truth in advertising?”
The Financial Planning Association stated in a written response to the SEC’s decision: “We believe that, at an absolute minimum, a consumer warning label is warranted given the confusion in the marketplace over who is a broker agent and who is a fiduciary investment adviser…” and “the approach taken by this rule will be a disservice to the public over the long-term if it only formalizes two different kinds of regulation for the same advisory service.” A line in the sand has been drawn, and two distinct classes of financial professionals now exist – those that accept fiduciary responsibility and those that hide behind an exemption.
As for me, I accept the responsibility of being a fiduciary and of always putting my clients’ interests first. In the management of any assets entrusted to me, I will work in accordance with prudent investment practices. In other words, I pledge to manage my clients’ assets as carefully as I manage my own.