2010 Top Wealth Managers: The Regulatory Breeze From Washington

Top Wealth Managers cite regulatory change as a critical risk to firms for 2010

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2010 is a landmark year for financial services of all kinds--given ongoing tumult in the economy and markets and proposed legislation that is emanating from Washington. Change may be the watchword for this year and next--and registered investment advisors (RIAs) will feel it along with nearly every other financial services entity. Not since the Investment Advisers act of 1940 and the Supreme Court case, SEC v. Capital Gains Research Bureau, Inc., in 1963, have there been more sweeping changes contemplated.

2010 is a landmark year for financial services of all kinds--given ongoing tumult in the economy and markets and proposed legislation that is emanating from Washington. Change may be the watchword for this year and next--and registered investment advisors (RIAs) will feel it along with nearly every other financial services entity. Not since the Investment Advisers act of 1940 and the Supreme Court case, SEC v. Capital Gains Research Bureau, Inc., in 1963, have there been more sweeping changes contemplated.

Regulatory uncertainty was often cited as one of "three most critical risks to your firm" by the RIAs who participated in Wealth Manager's 2010 Top Wealth Managers annual survey. One fundamental change may be that brokers who provide advice to investors would have to do so under the fiduciary standard, just as RIAs do under the Investment Advisers Act of 1940.

From an investor perspective, this is probably the most important change in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by the House on June 30, with the Senate expected to vote after they return from recess on July 12. The legislation "Gives SEC the authority to impose a fiduciary duty on brokers who give investment advice--the advice must be in the best interest of their customers," according to the summary release from the House Financial Services Committee.

How would this change the landscape for RIAs?

Obviously, the fiduciary duty of loyalty to clients already informs the thinking and processes at RIA firms--however, there is every reason to ensure the fiduciary process and procedures and knowledge base are current and are being followed--as firms differentiate themselves further and the SEC and states beef up exams and enforcement. This editor is a member of The Committee for the Fiduciary Standard.

For clients of RIAs, this most fundamental of underpinnings would not change, but the discussion of the fiduciary standard with clients may get more intense now that this has gone public, and will get even more exposure during the six-month study and rulemaking beyond.

But there may be very significant changes which could affect RIA firms and their clients in very important ways. For instance, will proficiency exams be required for investment advisors and their representatives? Will the SEC continue to regulate RIAs? Will there be an RIA-self regulator? There's been talk of FINRA regulating RIAs; how would that work? What organization would regulate hybrid independent broker/dealer-RIAs? What added educational requirements would be necessary for brokers who provide advice to assist them in the transition to fiduciary duty?

Who Will Regulate RIAs?

  • Will RIA firms with $100 million or less in assets be required to move from federal (SEC) to state regulators to lift some of the regulatory and enforcement burden from the SEC?
  • Will state-regulation for RIAS be uniform enough to protect investors or will there be new spike in regulatory arbitrage?

Aside from the compliance and procedural changes that may come from 2010 legislation, there are practical challenges for RIAs as well. Now, the difference between standards for brokers who provide advice and RIAs that provide advice--suitability and the fiduciary standard--are stark. RIA firms will have to look at how they differentiate their firms from broker/dealers as the industry moves forward.

Surely the move to fiduciary duty for all who provide advice will be a plus for investors who, for the most part, believe that the advice they are getting is in their best interests no matter who is providing it. But it will also present challenges to RIA firms to take another look at their value proposition, review their fiduciary processes and keep an eye on other changes that will follow in the wake of regulatory reforms.

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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