No one’s said anything yet about it, but a fiduciary standard will mean not just keeping an investor’s interests ahead of one’s own. It will also mean making sure that customer knows what that is costing.

To be sure, a standard is coming. In a speech to the Society of Corporate Secretaries in Chicago last Friday, Securities and Exchange Commission Chairman Mary Schapiro sounded ready to implement a universal standard of care on anyone who provides investment advice to retail clients.

“I have long advocated such a uniform fiduciary standard and I am pleased that the legislation would provide us with the rulemaking authority necessary to implement it,” said Schapiro in prepared remarks issued by the SEC.

How the SEC might use that authority remains to be seen. The financial reform bill requires the SEC to conduct a six-month study of the differences in oversight of investment advisers and brokers. It also permits the SEC to issue a regulation to subject broker-dealers to the same “best interests” standard of care that applies to investment advisers. Broker-dealers now follow a far lower suitability standard, which means that any suggested investments must be appropriate for a client.

While there is no guarantee that the SEC will impose a universal fiduciary standard, broker-dealers shouldn’t take anything for granted.

Disclosure in a fiduciary standard goes well beyond disclosure in a brokerage environment. Rather than simply providing reams of boilerplate information, as is often the current practice at brokerage firms, financial advisors need to ensure that clients understand and consent to any conflicts of interest -- and that means disclosing any and all fees.

Doing so is difficult from an operational perspective because broker-dealers have a variety of revenue streams, according to Sean Cuniff, a research director for securities, investments and finance at TowerGroup in Needham, Mass. Those are advisory fees, revenue sharing, marketing, margin, float, account fees, and proprietary asset management fees.

Let’s take the 12b-1 marketing fees charged by mutual funds. Broker/dealers may have to disclose not only that they are receiving commission fees, or the overall basis points for the fees but just how much that fee will come to for each client's account. The broker dealer must calculate the overall fee first and then divide that fee among its client accounts depending on the value of their assets invested in each mutual fund.

Discrepancies can occur if the broker/dealer and the mutual fund company rely on different data or one of the two or both make the calculations on a spreadsheet rather than electronically. A key reason for different data: the B/D relies on internally-generated market values and contribution and withdrawal information while the mutual fund company is relying on values and information provided by its custodian bank.

Then to correctly divide the 12b1 fee per shareholder account, the B/D must also integrate its billing system – either proprietary or third-party – to a shareholder recordkeeping system. Then the billing system must be linked to the client reporting system so that the number is posted on the investor’s report.

And that’s just the tip of the iceberg. The broker/dealer must then store all of the records – the methodologies for the calculations and the calculations themselves – in a separate database for audit purposes. The broker-dealer also has to somehow electronically capture and store the investor’s acknowledgement that it understands all the fees and potential conflicts of interest in a separate database. Those databases will then need to be accessed by operations, risk management, compliance and data management executives.

What do B/Ds do today? “All broker/dealers calculate 12b1 fees they are owed and only some are able to split those fees out by investor account,” says John Bosley, chief operating officer of Bonaire Software Systems, a fee billing software provider in Boston. “With the right fee billing automation, fee disclosure isn’t that difficult but broker dealers have not been required to disclose those fees to the past.

Seth Johnson, chief executive of Redi2Technologies in Oakland, Calif., acknowledges there are only a handful of B/Ds who can calculate 12b1 fees down to the individual investor level. “Brokerages can calculate their overall 12b1 fees now but will have to either license a fee billing system or enhance their internal system to provide more granular detail,” he says.

Neither Bosley nor Johnson would disclose which types of B/Ds are best equipped to handle fee disclosures technologically nor would they discuss just how much it might cost a brokerage firm.

One estimate provided by an operations executive at a New York brokerage firm: at least $1 million not only to build a billing system but create internal databases to store the fee information. And the billing system might not be used for all of the fee calculations.

Yet another operations executive at a New York brokerage firm gave a far lower number based on the fact that third-party billing systems typically also include a fee database. Fees to license a third-party billing system can come to as little as $50,000 a year to as much as $250,000 depending on the volume of accounts and size of the firm.

Analysts project that full service brokerages such as the newly joined Morgan Stanley Smith Barney and Bank of Ameirca Merrill Lynch will be the most affected by any new fiduciary rule.

“They still operate in a sales-based culture and derive considerable revenue from traditional sources such as commissions, margin lending and revenue sharing that pose conflicts of interest in a fiduciary environment,” says Cuniff. “The full-service firms also have the most representatives who need to be trained and licensed as well as the most complex business operations that need to be updated to reflect the mandates of a fiduciary standard environment.”

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