More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- The Custody Rule and its Ramifications When an RIA takes custody of a clients funds or securities, risk to that individual increases dramatically. Rule 206(4)-2 under the Investment Advisers Act (better known as the Custody Rule), was passed to protect clients from unscrupulous investors.
Don't get me wrong: I'm happy to be back at Investment Advisor. In fact, I've always considered the IA folks to be the good guys of advisory publishing. Maybe that's because I hired many of them, or perhaps because it was "my" magazine for a brief five years. Still, it's a sobering thought that I've now worked for both of the leading advisor publications--a total of five times.
I suppose the silver lining in my graying beard is the semblance of wisdom one begins to feel after all these years. Since we're starting a new year, and I'm starting a new gig (or restarting an old one) here at Investment Advisor, it seems like an appropriate time to offer some reflections on the state of the financial planning profession, such as it is.
The good news? There's more today to make one optimistic about financial planning than any other time in its history. As the profession has matured, it's become more firmly entrenched on the client's side of the table than ever before: financial planners have indeed become the good guys of the financial services industry. To paraphrase Austin Powers: Clients want them, and the rest of the industry wants to be like them. Yet recently I've also noticed a dark cloud--or more accurately, had it pointed out to me--that's hovering over the nation's capital that makes me fear for the future of financial planning itself--or at least for the good things it's come to represent. That's because the good guys don't always win.
First, let's talk about what's right with the planning world these days. It's hard to point to an exact moment when planning took its major turn for the better. Was it in 1986, with the formation of the independent CFP Board of Standards? Or the growth of fee compensation that followed the equity market crash in 1987? Or perhaps it was the revised and much more difficult CFP exam that was introduced in 1994?
Each of these events was important for the emergence of a planning profession and laid the groundwork for future advancements. But to my mind, the point that will probably prove most significant to the future of the profession is the formation of the Financial Planning Association out of the old IAFP and ICFP. By creating a single organization (with the exception of those few holdouts at NAPFA), financial planning now had one forum, one direction, one designation, and one voice for the first time in 30 years.
After an understandable period of adjustment to its new stature, the FPA has begun to fulfill its promise. Missteps like creating a "financial planner" division--can you imagine a "doctor" division at the American Medical Association?--notwithstanding, the FPA has taken major steps toward focusing its agenda by kindly asking its broker/dealers to set up their own association, and then filing suit against the Securities & Exchange Commission to challenge the Merrill Lynch rule. I even hear rumors these days that NAPFA is getting close to merger talks. None of these things would have been possible without the FPA.
That's not all that's good. While it's still way too early to call it, the hiring of Sarah Teslik as CEO of the CFP Board has the potential to rival the formation of the FPA in importance. An experienced pro who's spent the last 16 years at the Counsel of Institutional Investors battling against the financial services industry for shareholders' rights, Teslik represents the first time the CFP Board is in the hands of a full-time leader who truly understands the financial services industry, Washington, and the consumers' perspective. She recently told me that for the past 20 years, pension funds (which she's been representing) have been the bomb in financial services. Now that baby boomers are retiring, the limelight has shifted to the services offered by financial planners. She'd like to help shape how those services are delivered. I'm sure she will, and I have little doubt the profession will greatly benefit from her presence.
Then there's practice management. Two recent events are radically changing the business of financial advice, one initiated by Business Transitions in Portland, Oregon, and the other by Mark Tibergien at Moss Adams in Seattle (by way of disclosure, both are clients of mine). Five years ago, Business Transitions created an online independent marketplace to buy and sell advisory practices. Today, thousands of buyers bid on hundreds of practices, which typically sell in two or three months. For the first time, independent advisors have a viable way to realize the value they've spent years creating in their practices. What's more, they have a large and efficient market made up of advisors like themselves to tell them what their practices are worth and how to create more valuable practices.
The second groundbreaking event came in the 2004 FPA Financial Performance Study of Financial Advisory Practices that was produced by Moss Adams. In it, Mark Tibergien and his team identified and quantified a phenomenon that has pervaded the planning world for more than 10 years: A large percentage of planners feel that although business is great, they are working harder and are making less money.
Tibergien's findings? Those planners are right. In a discovery they call the $1 Million Barrier, Moss Adams found that as annual revenues in typical advisory practices grow, expenses usually grow faster, creating higher expense margins and correspondingly lower profit margins. In fact, expenses continue to outpace revenues until revenue reaches around $1 million, at which point bigger business dynamics allow profitability to increase. This new understanding of the economics of practices will allow advisors to make a conscious decision to suffer the pains of growing larger or to remain smaller--and offers strategies to shorten the time it takes to break the $1 million barrier or to run a more efficient practice if they opt not to try.
An FPA to represent the profession, Sarah Teslik to help make the profession more professional and better positioned to capture those billions in retiring assets, Moss Adams to make your practice more profitable and less onerous whether you grow large or stay small, and FP Transitions to realize the value of your practice when it's time: They are all reasons to believe in a very bright future. Unfortunately, that's only half the story.
The other, possibly bigger, half of the future of planning is being written now in Washington D.C. The downside to having a weak CFP Board and the lack of one voice for the profession all those years is that when Washington goes into one of its periodic frenzies, financial planners are easy targets. Make no mistake, Washington is indeed in a frenzy. First, the collapse of a number of formerly stalwart companies--Enron, Global Crossing, Tyco, et al. Then the complicity of Wall Street and the big accounting firms in those debacles. Then Eliot Spitzer and the hedge fund/mutual fund scandals. Suddenly, the SEC seems asleep at the wheel, Congress looks like a willing accomplice, and both are scrambling to appear in control by DOING SOMETHING!
Under these circumstances, that "something" is rarely rational or helpful. So far, we've seen accounting oversight by non-accountants, mutual fund regulation that is costly to shareholders while not preventing scandalous market timing or insider fund arbitrage, and more important to us, beefed up compliance standards that threaten the economics of independent advisors.
I've recently sat in on two presentations about the current compliance situation for RIAs, and if it was the intention of the presenters, both compliance attorneys, to scare the heck out of the advisors in the audience, they succeeded. The bottom line: Regulators, both state and federal, aren't screwing around anymore. Violations that before would have received a friendly warning will today shut down your firm. Fines that used to cover payment of missed filing fees now will be based on business transacted during the period of violation--an escalation from hundreds of dollars to tens or even hundreds of thousands of dollars.
From records that have to be produced on demand, to chief compliance officers who need the juice to enforce compliance and sanction non-compliance, to compliance manuals that will serve as the standard against which your actions will be judged, the requirements, scrutiny, and penalties for RIA firms have taken a quantum leap forward. And that's just regulation. As I understand it, if your "canned" compliance manual describes any actions that you don't live up to, your chances of winning a client lawsuit, no matter how frivolous, is just about zero. In fact, everyone I talk to these days seems to know someone who's leaving the business rather than comply with these new regulations. There's even some speculation about whether solo practitioners will be able to afford to stay in business.
What' s more, there doesn't seem to be any end in sight. The SEC currently has myriad proposals under consideration, including reopening the discussion about a self-regulatory organization for financial advisors. Can you say NASD? Plans by Congress and the Department of Labor to require a fiduciary duty from as-yet-undefined "advisors" promises to change the entire financial services landscape. Will all "financial advisors" finally be held to the same standards as RIAs? Or will brokers receive another carve- out, and the standards get so watered down that everyone can claim to be a "fiduciary" but still conduct business as usual? The winner of this battle will surely dominate financial services for years to come.
The question for financial planners is whether the new muscle of the FPA and Sarah Teslik's lobbying savvy will be enough to keep the profession from getting the short end of the legislative/regulatory stick--again. The CFP Board has already left planners way behind the curve in the fiduciary battle by not already requiring CFPs to have that duty. Now that Washington is finally discovering the importance of being a fiduciary, instead of lobbying from the high ground that "we already do that," CFPs are in danger of being lumped in with the crowd who do not hold their clients' interests above their own.
It troubles me that when people are finally grasping the value of what planners have offered all along--client-orientation, long-term horizons, comprehensive advice--that the planning community has not positioned itself as the embodiment of those principals. Hopefully, the profession's organizations can do that now. But it may be too late, and if it is, then the good guys could easily find themselves just a subset of a much less attractive industry.
Bob Clark, a former editor-in-chief of this magazine, sagely surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at firstname.lastname@example.org.