I'm usually skeptical of "The Big Boys Are Out To Screw Us" theories.
For the most part, the financial world's powers that be aren't out to crush individual investors. The Street's heavy hitters have nothing against the little guy. They don't care about individuals at all, one way or another.
However, Wall Street's white horses do care about covering their own rear ends and keeping the edge they believe they're entitled to as long-time veterans. No one should blame companies like Merrill Lynch (NYSE: MER), PaineWebber Group (NYSE: PWJ), Salomon Smith Barney Holdings (NYSE: SSB) or Prudential for defending their territory.
Unfortunately, you should blame regulators for occasionally going along with those sentiments. Instead of resisting the large investment firms' natural desires, the feds sometimes accomodate them. And the government seems to be doing it again.
Have an opinion on this?
You might recall that the U.S. Securities and Exchange Commission last fall proposed a revision that would exempt certain advisory programs of full service investment houses from the Investment Advisers Act of 1940. Among other things, that law requires advisers who don't offer trade execution to file a form disclosing investment strategies, fees, conflicts of interest and previous violations of securities law.
Proponents of the so-called "Merrill Lynch" rule change note that companies combining investment advice and brokerage services traditionally charged clients based purely on trade commissions, so they weren't receiving compensation specifically for being advisers, and thus weren't subject to the Advisers Act. Now that the Merrill Lynches of the world offer full service packages based on flat fees or percentages of assets -- a good idea, in and of itself -- you could argue they're now receiving "special compensation" for advice, as defined by the 1940 law.
The SEC points out that despite the change in how they're paid, broker-dealers are still selling the same services they've had for decades. In other words, nothing has really changed, so the full service companies shouldn't fall under new regulations.
Independent certified financial planners raised an uproar about the proposal. And they're right.
Let's be honest, in this era of cheap online trading from E*Trade (Nasdaq: EGRP), Ameritrade (Nasdaq: AMTD) and others, few people (if any) use Merrill Lynch purely for brokerage services. Folks pay for the company's advice, specifically, so Merrill and its peers ought to disclose the same information as John Doe Financial Planning. If you're a Merrill client, you ought to be able to learn about possible skeletons.
Nothing has come of the proposal yet, though the public comment period ended four months ago. The brouhaha might have died down entirely, except the SEC recently unveiled another proposal related to the Advisers Act that would create an even bigger disparity between the Big Boys and independent advisers.
Last month the SEC made the very laudable suggestion that everyone governed by the Advisers Act should file disclosure forms electronically, so that you, the public, could have easy access. It's a great idea that complements the SEC's efforts with the EDGAR database and other online projects.
But when you consider it with the "Merrill Lynch Rule", you can see why independent advisers are angrier than ever. Not only would the big investment houses get away with non-disclosure, the smaller guys -- the ones with fewer resources -- become subject to greater scrutiny. That's like absolving Intel (Nasdaq: INTC) from IRS oversight while doubling taxes on Advanced Micro Devices (NYSE: AMD).
No doubt most independent advisers would prefer being in Merrill Lynch's situation rather than forcing Merrill to be in theirs. But this goes beyond adviser jealousy to affect anyone who gets advice from a member of the Wall Street Establishment.
If you had to choose only one group for heavier regulation, it should be the Big Boys, not the other way around. Isn't that why the feds are going after Microsoft (Nasdaq: MSFT) instead of Netscape? After all, both companies looked for exclusive browser agreements, but only one of them owned the operating system.
Likewise, large investment banks have far larger conflicts of interest than those lurking over the adviser down the street. John Doe Financial Planning won't serve as an underwriter on stock and bond offerings anytime soon. John Doe can't pump a stock so a mutual fund client can dump it at a good price.
Yet the SEC seems content with giving you online access only to the background of John Doe and not Merrill Lynch. You deserve more from your regulators. The comment period for the electronic filing proposal ends June 13.>