How New Fiduciary Standard Rules Affect the Discount Broker Sector

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This article will focus on new federal regulations that are set to be rolled out in 2013 regarding “fiduciary standards” for a variety of financial service providers including discount brokers.

While the politicos inside the Capitol Beltway were playing chicken with sequestration, vast regulations that the Obama Administration has on the line will affect broad sectors of the economy. In fact, some observers contend that the regulations could compound the damage of sequestration.

New Fiduciary Standards

While much of the attention has focused on the Dodd-Frank reforms, there are other considerations. In this regard, in May 2012 the Department of Labor released a proposed new rule that could increase the cost of retirement planning for middle-class workers. And the Department intends on rolling out a final decree in 2013.

The so-called anti-ESOP regulation mandating all private ESOP company appraisers be ERISA fiduciaries could tighten restrictions and increase litigation risks for businesses that offer retirement investment guidance on a commission basis. Meanwhile the Securities Exchange Commission has been considering a fiduciary standard rule for broker-dealers under the Dodd-Frank reforms.

And the redundancy could cloud the waters on creating much needed uniform fiduciary standards for brokers and advisers. Moreover, some observers argue Labor’s Fiduciary Rule could result in higher retirement account minimums and fees that will touch about 72 million people invested in 401 (k) plans as well as individual retirement accounts (IRAs).

This is so because the new rules will ultimately require additional licensing requirements and filings, related fees, standardized educational course requirements, additional disclosures and so on. In short, higher compliance costs will be passed along to consumers by way of higher fees.

At the end of the day, there is a need to have standards that level the playing field. But the goal should be to ensure both retail consumers and investors have sufficient information to make good choices. And building better regulatory mousetraps may have the opposite effect on some of the smaller discount brokers.

Leading Discount Brokers

The Labor Department’s new rules should not be a challenge for outfits like Charles Schwab ), TD Ameritrade ) and E*TRADE Financial ).

The share price of Charles Schwab reached a new 52-week high this week and has seen solid volume of more than 10 million shares in the last month or so. The firm has a market cap of $21.44 billion and shares are up 18.2 percent so far this year. The company has a P/E ratio of 24.3, above the S&P 500 P/E ratio of 17.7.

Schwab is the “godfather” of the discount broker sector and some analysts believe the company share price might even continue its surge by 40% in 2013. In short the company is strong in a number of way including its solid stock price run, revenue growth, good cash flow from operations, climbing net income. All things considered Charles Schwab is still a good buy.

Things are also looking good for TD Ameritrade and the new highs being reached by the broader market is luring retail investors back into the game. In fact, the firm recently made news by announcing that its trademarked Investor Movement Index or IMX backs up this claim.

TD Ameritrade Holding Corporation provides securities brokerage services to retail investors, traders, and independent registered investment advisors (RIAs) in the United States.

The firm has a market cap of $10.7 billion, and a price/earnings ratio of 18.4, above the S&P 500 P/E ratio of 17.7. Shares are up about 18 percent this year. But the question remains whether or not the stock price can continue its push past the 52 week high. There is a fork in the road on this point as an equal number of analysts rate it a hold compared to those who can consider it a buy. In light of this, TD Ameritrade is probably a hold with Schwab being more attractive.

Finally, E*Trade continues to struggle to get its sea legs in the wake of its ill advised foray into bad mortgage land. The firm recently named a new head honcho who will be tasked with shedding the bad mortgage paper while turning the ship back to its online brokerage roots.

Last week the company reported a fourth-quarter loss that exceeded views on the Street and the debt retirement scheme cost it $257 million. The company reported a loss of $186 million, or 65 cents a share, for the fourth quarter. This news came on the heels of 2012 third quarter losses of $29 million, or 10 cents a share.

The overarching question is whether E*Trade can purge the credit problems and rebuild its building brokerage revenue. But the outfit has already lost hundreds of millions of dollars in the mortgage unit’s mortgage debacle. And this means sell for those who have not already pulled the trigger.


Kyle Colona is a freelance writer from the New York area with an extensive background in legal and regulatory affairs in the finance sector. His extensive body of work is accessible on the web. Mr. Colona is not a financial advisor and he does not hold a position in the stocks mentioned herein. This article is for informational purposes only and should not be construed as financial advice.

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