More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
By Dr. Lewis Altfest
Now that the financial reform bill has passed, a few remarks are in order both on how effective it will be and how it will impact the advisor community.
There is merit to the restriction of proprietary trading at wirehouses and large institutions. I think the Volcker Rule is right in its proposal to separate the derivatives business from a financial institution's core function. Derivatives absolutely should be traded on an exchange. There might be instances where exceptions could, and should, be made. But having them trade on an exchange will not only result in freer market conditions, but it will also shine a light on them, make them more transparent and we'll therefore allow all of us to know what's good and what might be a potential problem.
I'm a bit wary of the new Consumer Protection Division within the Federal Reserve. It's set up to guard against abusive practices in areas like the mortgage industry or the credit card industry. It might be a good thing, but then again it's not their prime area of expertise.
However, I absolutely believe in the new council on systemic risk. All these claims about not being able to see bubbles are not to be believed. Former Fed Chairmen William Machesney Martin and Paul Volcker saw bubbles forming. Machesney Martin made the famous quip about the Federal Reserve and the punchbowl. It's the Fed's job to take the punchbowl away just as the party gets interesting. Then no one gets drunk and hurts themselves or others. And that's exactly what loosening and tightening credit is all about; knowing when to take the punchbowl away. I've been through many cycles and we're all supposed to be big boys and let the free market happen. But if we had a more activist Federal Reserve in 2005, we certainly wouldn't be in the position we were in today.
Ultimately, I feel the independent advisor will not be significantly affected on a granular, day-to-day basis. We will be affected on a macro level like everyone else, but not on a micro level were it has a significant impact on our business operations. However, the wirehouse advisor is a different story. Unlike many of them, we're not about selling the "hot, new thing." In fact, we're about doing the exact opposite. When it blows up is when we decide to buy. We have clients in certain mortgage-backed securities that have done quite well for them. We make money when the market goes up or down. But this crazy ride we've been on is just not worth it. I know both my clients and myself would have greater piece of mind if volatility like this didn't occur. Hopefully, this bill will help ensure it doesn't happen.
Dr. Lewis Altfest is CEO and CIO of Altfest Personal Wealth Management in New York.