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Stock Brokers: An Endangered Species?

By Hal M. Bundrick

NEW YORK (MainStreet) Traditional brokerage firms, like Merrill Lynch and Morgan Stanley, are facing greater challenges to keep clients, and brokers, as the industry braces for a tectonic shift. These stalwarts of the business, traditionally called wire houses, are looking for ways to remain competitive as a higher code of customer care, the fiduciary standard, becomes more prevalent. As one industry observer notes, brokerage firms have discouraged their advisors to act as fiduciaries because "many are not competent enough" and doing so would expose the firm to significant liability.

"There always seem to be certain events or cycles where some experts say that wire houses will not be able to compete against RIAs (registered investment advisors) and independent advisors because of their more restrictive model," writes Fred Barstein, on NAPA Net.

"That conversation arose after the imposition of 408(b)(2), which requires advisors to disclose in writing whether or not they are acting as a fiduciary for the services they are rendering and the associated fees." Barstein is the founder and executive director of The Retirement Advisor University, and editor in chief of the National Association of Plan Advisors website.

The Department of Labor as well as the Securities and Exchange Commission are working to codify the fiduciary standard.

While wire house brokers serving retail customers are seldom allowed to "put the client's interests first" under the mandate of a fiduciary standard -- serving to a less-stringent "suitability standard" -- some brokerage advisors working with company-sponsored retirement plans are permitted to offer fiduciary advice.

"All of the wire houses now allow a select group of their advisors to act as ERISA 3(21) fiduciaries, with certain restrictions -- they must have a minimum number of plans and assets under management; fiduciary services may be provided to larger plans only; and some type of industry designation must be completed," Barstein writes.

But Barstein says not to count wire houses out just yet. Brokerage firms have the benefit of national brand recognition, deep pockets and long-term relationships.

"Firms tied to a retail bank, like Merrill Lynch and Wells Fargo, have other obvious advantages, with Merrill starting to capitalize on BofA's relationships by teaming up corporate loan officers with designated plan advisors," Barstein writes. "Other firms team up advisors who may not focus on the (employer-sponsored retirement plan) market with specialists offering partnerships for larger firms or publicly traded companies. So once again, the demise of wire houses is greatly exaggerated even with new fiduciary regs looming."

--Written by Hal M. Bundrick for MainStreet

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