Recently, I attended the Fi360 Conference in Scottsdale. The conference was excellent, and as you might expect from a conference affiliated with the Foundation for Fiduciary Studies, some of the sessions and much of the buzz between them revolved around the looming Washington re-regulation of financial advisors. The underlying message wasn’t particularly encouraging.
Although it wasn’t specifically on re-regulation, one of the most insightful sessions was given by compliance attorney Brian Hamburger. Ostensibly dispelling a series of widely held RIA compliance myths, Brian made one of the most poignant observations of the conference, when assessing the potential for a massive overhaul in advisor regulation (which I confirmed with a source close to the SEC): “The FPA/CFP Board/NAPFA coalition [the Coalition for Financial Planning] made a very strategic mistake,” he said. “Until recently, the conversation in Washington was about whether we needed to change the way advisors are regulated. Then, the Coalition threw its hat in the ring , alongside FINRA, to become the advisor regulator. Suddenly the conversation moved from if we need it, to who would be the new regulator of RIAs.”
Why is this important? Because FINRA and its predecessor the NASD has been angling to become the regulator of independent RIAs since I started covering advisors in the mid-1980s. While we were still debating whether we need RIA re-regulation (Hamburger believes we don’t), there was a pretty good chance that FINRA’s efforts would one again be rebuffed. While registered reps would have continued to be supervised by FINRA and RIAs by the SEC, we stood a reasonable chance of changing the existing rules to level the playing field, such as eliminating the infamous “broker exemption” to the RIA Act of 1940, or at least establishing a fiduciary duty for brokers, too.
Now that the FPA et al has naively moved the debate to whom should be the new regulator of advisors, the independent advisory industry faces a much bigger problem: the very real possibility that FINRA will convince the SEC and Congress they are the only viable choice. From a Washington perspective (which is the only one they’ll take seriously), it’s hard to dispute that claim. Which is more publicly defensible? Turning RIA oversight to the CFP Board–a small nonprofit with minimal staff that barely oversees about 60,000 CFPs, most of who are registered reps anyway and consequently have, at best, a part-time fiduciary duty to their clients, or to turn to the massive FINRA, which has nearly half a century of experience supervising some 700,000 brokers and B/Ds, with thousands of examiners and many testing sites across the country?
This is clearly the path of least resistance—which Congress is usually happy to take. Unless the Coalition can stage something close to a miracle comeback, it’s beginning to look like the perennial RIA nightmare may finally become a reality.
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I wrote about this in my book, Keep Your Assets Take My Advice and sent out a press release on this very subject recently. RIA’s are in a tough spot without one clear leadership organization.
FINRA has much more political clout in Washington than the Financial Planning Coalition. It certainly does not help matters that an ex-head of NAPFA is in hot water. I wonder about the timing of that, in addition to the Tower Group white paper. Although I applauded their efforts, the Financial Planning Coalition has a lot of FINRA registered people in it. Are these factors together just a striking co-incidence? Or, could it be the work of behind-the-scenes FINRA lobbyists? I would not be surprised.
My guess is we will see more stories promoting FINRA as the regulator of choice.
Personally, I feel we need a wall between FINRA registered representatives and RIA’s. If FINRA RR’s want to sell product, then let them. However, do not also let them wear two hats and also claim to be fiduciary RIA’s. You cannot have a fiduciary standard of care with sales quotas to maintain your office perks. There is no disputing that fact.