Firms look to profit from end of broker-dealer rule

NEW YORK — Companies that provide training and manufacture software aimed at investment advisers expect to cash in on the recent demise of the broker-dealer exemption rule. That’s because the rescission of the rule is likely to ignite a stampede of brokers rushing to register as investment advisers before the rule change goes into effect. “We’re anticipating that a number of the larger firms may need to go back and look at who may not be licensed,” said Melaine Kimmel, senior vice president of securities education at Kaplan Financial, a Chicago training firm. Year-to-date through May, fully 18,571 people had registered to take the Series 66 test, compared with 15,198 during the first five months of 2006. Another 10,883 applicants had signed up to take the Series 65 exam, compared with 12,375, according to the North American Securities Administrators Association Inc. of Washington. Washington-based NASD administers both exams for NASAA. Both qualify financial professionals to register as investment advisers. After deciding not to appeal a March federal appeals court decision to set aside the broker-dealer rule, the Securities and Exchange Commission requested that the change not go into effect until Oct. 1. If the agency gets the extension, some 1 million accounts will have to be transferred out of fee-based brokerage programs by that date, according to the Securities Industry and Financial Markets Association, a trade group with headquarters in Washington and New York. Not only is the pressure on firms to decide what they’ll do with these accounts, but brokers are under the gun to get the proper certification necessary to oversee them. “A number of clients won’t want to go back to the commission structure from before,” said Richard Salmen, a certified financial planner with GTrust in Overland Park, Kan., and a director of the Financial Planning Association in Denver. “There will be an increased number of people who will take the Series 65 [over the next six to 12 months] so that they can offer fiduciary help.” Not surprisingly, companies that make the software used by planners are stepping in to help with that transition. FundQuest Inc. of Boston, for example, has launched a suite of conversion services which includes adviser training for fee-based brokers. “We assist with consulting and train professionals on regulatory and statutory compliance,” said Brian Corkery, vice president of institutional sales at FundQuest. “But we don’t handle test prep or filings for them.”
FundQuest and others also are focusing on the investment policy statement, a document that spells out exactly what clients can expect in services from a broker or investment adviser, and gives a breakdown of asset allocation details and solutions to meet portfolio objectives. “We have this understanding in writing,” said Robert Rowe, founder and managing partner of MyInvestmentPolicy.com, a Chicago-based provider of investment policy software. “If I stay within those boundaries, you as a client will be comfortable, and I won’t have to worry about potential litigation.” Although the bulk of his clients are financial advisers, Mr. Rowe said, more broker-dealers and RIAs are using his services of late. “Under the Merrill Lynch rule, without written goals, it was impossible for professionals to meet fiduciary responsibilities,” he added. Nevertheless, the best way to head off legal trouble is to become properly certified as an adviser, according to one observer. “Regardless of whether professionals use these advising training programs, unless they are a CFP, [chartered financial analyst, personal financial specialist, chartered investment counselor or chartered financial consultant], they’ll have to take the exams,” said Sheila Cahill, chairman of the exams advisory group for NASAA.