Maria Elena Lagomasino and Harold Evensky among those giving nod to Mississippi law students

April 18, 2011 — 1:39 PM UTC by Elizabeth MacBride


With Washington D.C. on a budget-cutting tear, a handful of influential fiduciary advocates are breaking from the rest of the industry’s just-say-no approach to a self-regulatory organization for advisors.

The Committee for the Fiduciary Standard, an influential group that includes some of the most respected advisors and service providers in the industry, today endorsed an SRO that’s being cobbled together by Mercer Bullard, a Mississippi lawyer and investor advocate, and a group of his law students.

The stature of the Committee’s steering committee members, who include Maria Elena Lagomasino, of GenSpring Family Offices, Harold Evensky, of Evensky & Katz and James Patrick, of Envestnet, may help legitimize Bullard’s organization, which until now has been politely dismissed by the established advisory groups.

Political realities

The Committee for the Fiduciary Standard seems to be bowing to new political realities. Its preference would be to have no SRO at all, but given the anti-government fervor in the capital, some are worried that SEC oversight, which costs hundreds of million of dollars, is just too tempting a target. FINRA, the broker-dealer self-regulator, has been angling to be advisors SRO. See: Rick Ketchum reveals plan for advisor oversight at FSI conference.

But the challenge of establishing a new advisory industry SRO is too great to take on, groups ranging from the Investment Adviser Association, CFP Board of Standards, the National Association of Personal Financial Advisors, and the Financial Planning Association have said. They also have argued that SROs are inherently conflicted and less objective than a government regulator. See: SEC presses case for user fees in much-anticipated report to Congress.

The groups are taking the “responsible position” as the IAA’s David Tittsworth termed it, in lobbying for the SEC to remain the industry’s regulator.

Barb Roper, director of investor protection for the Consumer Federation of America, spoke out against the groups’ risk-averse approach.

“I … think it is foolish for advisers to continue to pursue a “Just Say No” approach on the SRO issue. I understand that many are reluctant to do anything that would imply support for the SRO concept. The situation being what it is, however, I think that approach is likely to leave them with little say over how an SRO is structured if the proposal to create an SRO moves forward,” said Roper, when Bullard first announced the effort.

Bullard’s announcement that law students working was a fairly blatant attempt to put pressure on the advisory groups to work on an SRO.

The Committee’s endorsement is one sign that his tactic is paying off.

Tyler Roberts is one of the law students working on an advisory SRO.
Tyler Roberts is one of the
law students working on an advisory

Authentic fiduciary standard

The Committee said in a statement that it still strongly prefers the SEC as advisors’ regulator. But it’s breaking with the rest of the industry in endorsing the Self-Regulatory Organization for Independent Investment Advisers (SROIIA) as a backup plan.

“If Congress determines there will be an SRO for investment Advisers, SEC registered investment advisers deserve a choice. The Self-Regulatory Organization for Independent Investment Advisers, (SROIIA) seeks to be an SRO imbued with an unwavering commitment to the authentic fiduciary standard. This is what investors expect; this is exactly what they need.”

The Committee drew a contrast between FINRA’s use of the suitability standard to regulate broker-dealers and SROIIA’s commitment to what the Committee calls the “bona fide” fiduciary standard.

“Given the funding issues currently facing the SEC, it may not get the resources to continue to regulate registered investment advisers. In that event, the Committee supports an alternative self-regulatory organization (SRO) that clearly demands a “bona fide” fiduciary standard,” says Sheryl Garrett, founder of the Garrett Planning Network and a founding member of the Committee. See: Eavesdropping on the Garrett retreat: A white-knuckle drive; why independents aren’t winning assets as fast as they should be; and six steps to building client trust.

But the cost …

The big unknown about forming an SRO remains the cost. Bullard and his students are suggesting that an advisory industry SRO would serve about 20,000 reps of RIAs. There are a total of about 34,000 reps that are not dually registered, according to FINRA. The 20,000 figure is a ballpark of the number of those who would prefer oversight by an advisory industry SRO, said student Timothy Collins.

TJ Collins said the new SRO will have survey results by mid-summer.
TJ Collins said the new SRO
will have survey results by mid-summer.

The group is now in the midst of surveying 1,000 investment advisors about what kind of SRO they would support, and expects to have results in mid-summer, Collins said.

But the group is not working on a cost estimate for the SRO, or asking advisors what kinds of user fees they would pay.

Based on the amount of money that the SEC spends on advisor oversight, an SRO could cost several hundred million dollars to run – after set-up costs.

A previous version of this story used the word “purist” in the headline. RIABiz removed it after Committee chairman Knut Rostad pointed out that the Committee agrees that the fiduciary standard is compatible with commissions. A fiduciary purist likely would not take that stand.

Mentioned in this article:

Garrett Planning Network
RIA Set-up Firm
Top Executive: Sheryl Garrett

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