Investment advisors and brokers are watching the industry change before their very eyes. It could change a lot more depending on how the SEC handles some big issues. The biggest of these is the "fiduciary standard vs. suitability" issue, which has defined the adviser vs. broker debate for a decade now. 

People have been debating this ad nauseum, and a definitive ruling would be welcome if only to let the diehards on both sides finally move on. A significant event looms. A Dodd-Frank-mandated study is due to Congress by Jan. 21, which is "likely to inform the SEC's future activity." Recall that Dodd-Frank gave the SEC a mandate to create rules in this area. 

At issue is the existing rule set that imposes separate duties on traditional brokerages likes Merrill Lynch (suitability) and RIAs (fiduciary). The history here is very interesting. Recall the old Merrill Rule, which allowed traditional brokerages to offer RIA-like products but remain exempt from regulations under the Investment Advisors Act. In effect, they could offer these products under the suitability standard, while RIAs had to abide the tougher fiduciary standard. The debate culminated in a court decision in 2007 that struck down the Merrill Rule, to great cheer in the RIA industry. The brokerage industry was devastated when the SEC decided not to appeal the decision. 

But this was not the death knell for brokers offering RIA-like products and services. They were required to offer more disclosure, and in the end, the demise of the Merrill Rule was something of a non-event. The brokerage industry has continued to trend toward fee-based accounts, for better or worse. Brokerages will continue to offer both for a long time, however, to the chagrin of advisors who think a single broker can't possibly be both. All in all, it's hard to see a lot of marketing dollars going to commission-based accounts only. 

The RIA industry was not content to abolish the Merrill Rule. It wanted to force the tougher fiduciary standard on brokers, and that has led us to this moment. The big day looms. 

The traditional brokerage industry has proposed a requirement based on better disclosure of possible conflicts of interest to end customers. RIAs argue that current disclosures, even if enhanced, have never been enough. Related to this is the issue of FINRA regulation of advisors, which will be the topic of a separate study that is expected even earlier. FINRA will likely end up facing pressure to show advisors that it can regulate non-broker services and appreciate them for what they are. 

In the end, we'll likely see the adoption of a single standard that somehow encompass elements of both suitability and fiduciary standards but will be pitched as fiduciary standard. This will allow the SEC to put the investor first in its communications, an understandable need right now. Depending on how the standard is written, this could be the best compromise. The new standard will not really give either side a regulatory advantage. And it will in theory create a more level playing field that will be simpler for end customers to understand. - Jim