There's a great post at the Financial Planning magazine web site by Bob Veres regarding the appointment of Mary Schapiro as head of the SEC in the new administration. Schapiro was most recently the head of FINRA (Financial Industry Regulatory Authority, but you knew that, didn't you?), the regulatory agency responsible for oversight of the financial securities firms in their dealings with the public. Seems like a reasonable appointment, athough Veres has some very legitimate insights and concerns. The trend, claims Veres, is extremely ominous for financial planners and, as the title of his post indicates, is really in the wrong direction for what the public needs to restore trust in the industry, and for what independent advisors and planners really need for their business.
The crux of the issue is that independent RIA's generally have to conform to fiduciary standards, taking on the liability risks of not always putting their clients best interests ahead of their own. This is a fairly simple concept in design, with lofty expectations for ethical behavior and easy to implement and adhere to in practice, with conscientious self-oversight. The alternative approach is for the advisor and/or the advisor's firm to operate in their own self-interest (well, not being held liable for doing so), but working tightly within the regulated environment and compliance constraints established by FINRA, the SEC, and other federal, state, and industry regulatory bodies.
For years the major firms have pushed back against holding their advisors to the higher fiduciary standard (their primary objective has to be to make money for shareholders, no?). We've seen how well this has been working out. Now, bringing Schapiro from FINRA to the SEC seems to imply, consistently with her remarks over the past year or so, that FINRA compliance requirements may be increasingly applied to independent RIAs in lieu of a fiduciary standard. Clearly this is bad news for consumers who again have to go back to wondering in who's best interest is my advisor operating. As Veres concludes, however, the prognosis is not good for advisors either:
I'm going to go out on a limb and make a few predictions here. I expect that Congress will follow the money and do what the large institutions want them to do: Wrap the RIA world, including fee-only planners, inside the FINRA regulatory scheme. This, I predict, will spark a resurgence in brokerage firm market share, as planners try to adjust to a very different regulatory landscape and are subtly delayed, harassed and generally discouraged. Because of much higher regulatory costs, many fiduciary advisors will sell their practices and retire. {My emphasis - GK}
Then, on the watch of FINRA and the Schapiro-led SEC, there will be a new round of scandals, a new raft of bitter consumer complaints and yet more damage to people who will no longer be able to retire because they were sold the latest hot products by emboldened salespeople posing—with regulatory sanction—as professional dispensers of impartial advice.
The lessons of the recent past could not be more obvious. The large firms and their reckless, greedy executives have made it abundantly, painfully clear what kind of regulation they do not want. If Washington accommodates them now, after they have blown up the global financial system, I really can't see how any future scandal will teach them anything new.
This appointment is a wake-up call to honest RIAs and to the public as well. I would like to see a groundswell of financial planning clients telling their elected representatives something very simple. Instead of bringing in a regulator who is hostile to the fiduciary concept, who believes that more rules and more paperwork will fix what they have clearly not fixed in the past, we should simply do what the repeat malefactors desperately do not want us to do. We should give individual investors the gift of knowing that the person sitting on the far side of the desk must, by regulatory fiat, put the consumer's interests first.
I agree that the public needs to have a stronger voice in the matter, although the specifics of industry regulations are frequently lost on the mainstream investor. If you are an advisor, take the time to educate your clients on the standards you are held to, and how you would like to see the industry evolve, and help give them a voice to our newly elected officials.
Houses and cars are quite expensive and not everyone is able to buy it. But, loan are invented to help different people in such cases.
Posted by: Dee35Hopper | January 03, 2012 at 10:47 PM