Long story short: The Financial Planning Association (FPA) files a lawsuit challenging the SEC's rulemaking in 2004. Three years later, the U.S. Court of Appeals found in favor of FPA, saying the SEC exceeded its authority when it granted brokers the exemption.

In mid-May, SEC said it wouldn't appeal the federal court decision that effectively prohibits fee-based brokerage accounts. But it did ask for a four-month transition period, during which "the Commission will consider whether further rulemaking or interpretations are necessary regarding the application of the Advisers Act to these accounts and the issues resulting from the court's decision."

Brokerage customers face decisions
Now brokerage firms face upheaval as a million customers with an estimated $300 billion of assets must switch to some other type of account, according a recent article in the Wall Street Journal. Most of the alternatives promise to be more expensive than the fee-based accounts, which typically charge 1 percent of assets per year.

Alternatives include:

• Traditional brokerage accounts in which brokers receive commissions for stock transactions and product sales to clients.
• Advisory accounts run by an RIA in which firms assume a fiduciary role.
• Mutual fund wrap accounts that charge an asset-based fee on top of fund costs.
• Separately managed accounts run by professional money managers that cost between 1 percent and 3 percent of assets a year.

On the surface it looks like investors with money at brokerage firms will lose as a result of the court decision. But maybe they never got their money's worth in the first place.

That holds true regardless of whether they put their assets in the custody of a broker or an investment adviser.

How advisers levy fees
An article in the May issue of the FPA Journal compares the three different ways in which financial advisers can get paid. Not all advisers take the fee-based approach. Author John H. Robinson attempts to expose the incentives at work in each compensation model, and he turns up some startling information.

"All three models contain incentives that align adviser and client objectives," Robinson says. But all three also "can create significant conflicts of interest."

The commission model gets the most flack.

The drawbacks are that brokers and advisers:

1. Are rewarded regardless of whether investments succeed or fail.
2. Have incentive to steer customers to high-commission products.
3. May be motivated to generate transactions for the purpose of increasing income.

On the other hand, commission-based brokers and advisers:

1. Operate in a competitive environment and don't want to lose customers.
2. Have incentive to forgo churning to engender trust and get more referrals.
3. Don't want to continually have to stake out new customers.

Here's a surprising finding. Robinson argues that if commission-based advisers put their own interests ahead of their clients, you would expect them to make a lot more money (measured by return on assets) than their fee-based counterparts.

"In fact, the opposite is true -- and by a rather wide margin. Industry data regularly report that the average return on assests (ROA) for brokers is below 0.75 percent, while the average ROA for independent RIAs is approximately 1.3 percent and rising."

Suddenly the investment advisers' white hats are showing signs of wear.