From the December 2008 issue of Wealth Manager Web • Subscribe!


Research from Needham, Mass.-based TowerGroup is always informative, but it would be a rare day that the firm's prolific output could be called psychic.

Well, that day came last week with the arrival of a report titled "2009 Top 10 Business Drivers, Strategic Responses and IT Initiatives in Brokerage and Wealth Management."

While remaining strongly optimistic about the future growth of wealth management throughout the report, authors Sean Cunniff and Matthew Bienfang were literally prescient in identifying regulation as the sector's top business driver this year:

"Wealth managers will increase spending on compliance in 2009 because they cannot risk a major scandal or compliance violation in an environment of heightened regulatory scrutiny following the financial meltdown in 2008."

And then there was Bernie Madoff, confessing to authorities that his incredibly successful business, Bernard L. Madoff Investment Securities, was actually a Ponzi scheme that bilked investors out of an estimated $50 billion.

So virtually overnight, the "new age of regulation" the TowerGroup report describes, that will force wealth management firms to focus on "increased advisor oversight and potentially react to a restructuring of industry regulators" went from a prediction to a fait accompli.

SEC registration, audits and their implied oversight have been the primary regulation for RIAs since the Investment Adviser Act of 1940 was passed. Madoff, by the way, did not register his advisory business until Sept. 2006. Although the commission aims to examine advisors within a year of registration and once every five years afterwards, no examination of BMIS, Madoff's advisory firm, had yet been carried out.

In recent weeks, the CFP Board, the FPA and NAPFA have, for the first time, joined forces to establish "appropriate standards of conduct" for the financial planning profession and, in the words of NAPFA chair Diahann Lassus, to be part of the "solution for updating and potentially creating new regulation to protect consumers." (See "Your Partners" in Wealth Manager's Jan. 2009 issue.)

Similarly, the TowerGroup report noted that "although many financial services professionals bemoan increased regulation, the industry is in many ways, reaping what it sowed during years of excess"...and, in the enhanced regulatory climate, can't risk a scandal.

"This absolutely has an effect on RIAs," report co-author Sean Cunniff, a CFP and JD, told Wealth Manager. "We hear that there have been some inquiries from clients who want to know how they can be sure that what's happening to Madoff's clients "won't happen to me."

Reeling--like everyone else--from the scandal, Cunniff believes "such schemes are perpetuated through personal relationships," such as those Madoff reportedly established at a Florida country club and on the boards of charitable foundations. Cunniff points out that if you examine the way most RIA practices--from small to large--operate, "the assets are generally held on independent platforms" by custodians who supply clients with statements, providing some degree of "transparency, and a level of checks and balances." BMIS used no independent custodian and sent clients paper--not electronic--statements and confirms.

"So I believe that everything we wrote [in the report] holds true," says Cunniff, adding that the [Madoff] case will only enhance it and bring even greater scrutiny of the industry, "which has never been at a lower point than it is now."

The situation has given the commission a "black eye," he says, and "there simply isn't any level of sympathy from the public or Congress for the SEC."

To make matters worse for wealth managers and financial planners who resist regulation, Cunniff points out that "the public outcry following the mortgage and credit crises coupled with the fact that the industry no longer has the financial resources it once did, impacts on the ability of the industry to push back, to lobby against regulation."

The TowerGroup report predicts that firms will turn to technology projects that will focus on advisor oversight, the streamlining and outsourcing of compliance functions and preparation for yet another compliance issue--the new cost basis requirements.

The other nine business drivers identified by the report are the retirement crisis and the opportunity it presents, risk management, advice and planning, business evolution, evolving revenue schemes, advisor recruitment and retention, generational wealth transfer, technology transference and globalization.

The report can be purchased online at the TowerGroup Store using this link: http//

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