Registered Investment Advisors beat the brokers.............

BOSTON (MarketWatch) -- Anyone who has ever coached youth sports knows that you "play to the rules." That means if really young kids are required by their league to make three passes before scoring, you work on making the passes; if older kids get to play using high school or college rules, your focus changes to playing at that level.

So when the game is investment advice and the rules change, you have to wonder how it will affect overall play for consumers.

Nowhere is that more true than with the recent appellate court decision that ruled in favor of the Financial Planning Association and against the Securities and Exchange Commission in a lawsuit that challenged the rules of just who could hold themselves out as a financial planner and what standards apply to various types of adviser.

On the surface, there is no question that the decision is a victory for traditional financial planners and for consumers. But there is some question as to the potential fallout now that the rules have been changed.

To see why, consider the rules, the changes and how the play of the financial-advice game could be forever altered.

The Financial Planning Association, which brought the lawsuit against the SEC in 2004, argued that regulators had rewritten the Investment Advisers Act of 1940 in a way that allowed brokers to offer the same advice as registered investment advisers without the fiduciary responsibility to put a client's needs and interests first.

In a split decision, the U.S. Court of Appeals for the District of Columbia held that brokers can only give financial advice if they are not paid for it.

You read that right: brokers must give either no advice or free advice. If they receive fees for providing financial advice, they must register with the SEC as investment advisers and adopt a fiduciary responsibility for their customers.

That appears confusing, but it's fairly simple: Investment advisers, which can include virtually all stripes of "wealth planner," are paid for providing counsel (and not just the sale of investments) and have that fiduciary requirement to their clients. Broker-dealers don't have that fiduciary requirement; without meeting that higher standard -- by registering as investment advisers -- they would be violating the Investment Advisers Act of 1940 if they charged consumers for advice.

The distinction is important because the rule affects many of the wealth advisers who work for full-service brokerage firms. Since 1999, when new rules allowed the brokerage houses to offer fee-based accounts, the big firms have been particularly aggressive in offering advisory accounts, with more and more brokers describing themselves as "financial advisers."

Number of fee-based accounts jumps

Cerulli Associates, a Boston firm that researches the brokerage business, says that fee-based advisory accounts grew by nearly 20% over the past three years. Those accounts, which now hold more than $272 billion, are particularly popular with new clients; those customers may not be quite clear on just what they are paying for.

The current issue of Smart Money magazine includes a terrific piece by Dyan Machan, covering an effort to gain empirical evidence on how eight big brokerage houses work with new clients.
"Of the eight brokers we visited," Machan's article says, "five offered us financial plans even though, by critics' standards, they weren't qualified."

The question, however, becomes what happens now.

The Financial Planning Association, in bringing the suit, wanted to create a legal standard for what financial advisers provide, and wanted to stress the importance of putting the customer's interests first. That goal is admirable.

If the SEC wants to continue to fight the case, the next step would be the U.S. Supreme Court, but it's hard to imagine that kind of effort would actually succeed. While one appellate judge sided with the regulators, the majority opinion so thoroughly broke down the SEC that I have a hard time believing the agency will go that route.

A lot of the issues around brokers holding themselves out as investment advisers had to do with marketing and exactly how brokers positioned their services. The court ruling makes no mention of marketing; it simply says that charging for advice is "special compensation" that forces brokers to be regulated as investment advisers.

Possible setbacks

The way a brokerage firm might play the game in this new environment would be to end its fee-based services. If enough firms stop charging asset-management fees and go back to commission structures, that's a big potential loss for consumers. While every form of advisory agreement has some form of conflict, most observers suggest that fee-based arrangements are the closest to being ideal; this ruling could set back the progress made on this front by a decade or more.

While brokers may not have had a legal reason to live up to the fiduciary standard, there is no doubt that many of them do. Plenty of optimists in the financial-planning community had hoped that the brokers of the world would someday cozy up to the fiduciary standard; those hopes would now appear dashed.

The one thing financial planners liked about the old rule was that it took away the broker's ability to be called a "financial adviser."

Brokerage firms might now say they provide financial-planning services for a fee, using some separate subsidiary company to provide the actual plan and burying commissions in the process, making it harder for consumers to know precisely what they are getting for their money and how their money is being spent.

The moral of this whole story is that this victory for the financial-planning business doesn't settle anything for consumers.

While the rules of the investment-advice game are changing, consumers must continue to start the financial-planning process with the same old questions about how advisers get paid, what they provide for those dollars and whose interests come first, because unless you have a scorecard and a rulebook, it's tough to tell who you might want to have playing on your financial team.