Invoking his own parents' small nest egg, the FSI chief projects a 2015 Finra takeover of SEC duties for RIAs

April 26, 2013 — 4:26 AM UTC by Guest Columnist: Jimmy Moock


Brooke’s Note: Well, all views are welcome. Do I understand correctly that the FSI’s view is that we can’t afford a fiduciary standard? And that eliminating the cost of imposing one will save small firms? Maybe that will work. In fact, it would probably work for the American health care system to harmonize the credentials of doctors, nurses and chiropractors to save us all money. Thank you to Jimmy Moock for applying his ear for telling quotes for the benefit of all of us trying to discern just how FINRA promoters advocate their position. See: RIA loyalists slam the SEC for playing into FINRA’s darkest characterizations of haplessness.

Dale Brown, president and chief executive of the Financial Services Institute Inc., has lobbied lawmakers and industry leaders hard to reconsider how the fiduciary standard is finalized and implemented.

So, it was no surprise to an audience of more than 70 wealth management industry professionals at Gladstone Associates LLC’s annual M&A conference that Brown chose to use his featured-speaker position to drive home the point. See: Bill Dwyer tells RIAs to advise more — albeit with heavy use of products — and tips his hand about his for-profit future.

“I think that we all have a responsibility as Americans and business owners in the industry to be engaged in the process of determining our laws,” Brown said Wednesday at the conference, held at the Cira Centre in Philadelphia. “We just don’t need to suffer more regulation that comes with unintended consequences.” See: As DOL contemplates stiff fiduciary-related penalties on advisors, NAPFA and FPA find rare concord with FSI.

Higher hurdles

Make no mistake, Brown believes that uniform fiduciary standards are going to be solidified and implemented by both the of Labor Department and Congress by the close of 2014, with any related laws to go into effect in 2015. See: FINRA is making dog whistle comments hinting its SRO ambitions still simmer.

Brown, who has helmed the Institute for nine years, counts more than 100 independent broker-dealers as members. In his speech, he emphasized that those firms account for more than 35,000 advisors representing more than 15 million households, in part to make a point about the impact of implementation of a fiduciary standard. The upshot: His constituents will face more regulatory hurdles than they do now.

“Firms will be squeezed from the business as a result of increased costs associated with greater regulatory burdens. At the institute, we are about access to advice for all. What many don’t understand is that smaller investors will have an even harder time accessing advice if this happens,” he said.

Can the SEC outsource to FINRA?

Brown expects that political gridlock will continue through mid-term elections in 2014. But, this won’t stop what he sees as the eventual solution for industry oversight.

“FINRA will expand its reach into investment advisor oversight and by early 2015 we could see Congress giving approval for a mechanism allowing the SEC to turn over enforcement to FINRA,” predicted Brown.

This compelled one audience member to ask him if the SEC’s resource limitations might indeed lead it to outsource some or all of enforcement to FINRA.

“When it comes to a new fiduciary standard, I suspect that we will see a revised proposal from the SEC within 12 months. They are likely to split the baby and make both sides mad,” said Brown. See: An advisor fee bill hits Congress again, this time gaining qualified support from RIA groups.

Current enforcement not enough

According to data Brown cited during his speech, the current SEC budget and resources indicate that advisory firms under SEC purview can expect to get a visit from the SEC once every 11 years, versus FINRA’s rate of once every two years. Brown suggested that this disparity in regulation will force new SEC Chairman Mary Jo White to work toward closing the gap in enforcement standards before the end of 2014.

“The SEC recognizes that working to harmonize standards is a good PR effort to improve its standing among consumer groups,” Brown said. “With 40% of RIAs having never received a visit from an SEC examiner, the reality is that the SEC knows it has to act.” See: One-Man Think Tank: The SEC’s custody examinations leave gaps big enough for Madoff to drive a bus through.

IRS influencing the game?

Brown’s commentary elicited a question from the audience that got more than a few people to sit up in their seats.

“Is the move to a uniform standard also a veiled attempt to eliminate the independent-contractor status of advisors working with independent broker-dealers?” an unnamed financial advisor asked.

Brown instantly agreed with the direction of the question.

“In the documentation around the broker-dealer and advisor relationship, the word 'supervision’ is used. That creates an immediate 'gotcha’ for those in the IRS who want to characterize the relationship as employer-employee,” explained Brown.

“The IRS doesn’t like the added complexity of dealing with 1099 workers, and it certainly is easier to collect revenue under the withholding system. Because certain industries abuse the rules, the IRS is very likely looking for ways to clamp down,” continued Brown, who wasn’t fully ready to connect the IRS’ motives to the effort to harmonize regulatory standards.

The takeaway

Early in his prepared remarks, Brown told the story of his parents, who managed to retire 20 years ago with less than $200,000 thanks to the advice and care they received from an independent financial advisor. It is precisely investors such as Brown’s parents who, from the Financial Services Institute’s perspective, stand to lose if regulations become more onerous.

“It comes down to access to advice for everyone. We believe that there is a way to harmonize the regulatory standards to keep this a possibility,” said Brown.

Jimmy Moock is vice president of Gregory FCA Communications, a PR firm based in Ardmore, Pa.

Mentioned in this article:

Gladstone Associates, LLC
Mergers and Acquisition Firm
Top Executive: Michael Bilotta, Managing Director

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