More On Legal & Compliancefrom The Advisor's Professional Library
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
FSI’s senior staff and leadership met with members of the press Tuesday morning at the organization’s OneVoice 2012 conference in Orlando for a wide-ranging discussion of the organization’s strong growth rate, regulatory challenges faced by independent broker-dealers and the issues they're grappling with when attempting to bring “quality, affordable financial advice to middle America," as chairman Joe Russo put it.
“We’re eight years on as an organization, and we are stronger than ever with the clarity of our message and strategy,” said Dale Brown, the organization’s president and CEO. “We sought to develop a plan for our future, and we’re in the second year of executing on that plan,” referring to FSI's five-year plan.
Brown said the organization’s mission is one of advocacy, and will remain so, noting it wants to be the “go-to source for the media and regulators when it comes to best serving the financial needs of clients.”
He added this year’s selection of Russo, a financial advisor, as the organization’s chairman was “intentional and strategic,” meant to boost individual advisor membership within the organization by understanding their needs.
Noting a more than 100% increase in the number of financial advisors within the organization in the past year—from 15,000 in 2011 to over 34,000 at the beginning of 2012—Russo said advisors “understand the dangers in the financial advisor space” and see the value in the advocacy and membership provided by FSI.
“It started with the prospect a few years ago of banning 12b-1 fees,” Russo (left) explained. “It captured the advisors’ attention. What regulators didn’t realize is that fully 20% of the industry’s revenue comes from 12b-1 fees. We were one of the first organizations to point to the benefits of 12b-1 fees in giving middle America access to financial advice.”
Larry Roth, vice chairman of the organization in 2012 and chairman-elect in 2013, added that in his 25 years in the industry, FSI is the first organization he’s seen that has effectively communicated with Congress.
Again echoing the help the organization can provide clients with smaller asset levels, Roth said, “This will pay huge dividends for the benefit of the broad-based, middle American client. We are now taking all this energy and enthusiasm and packaging it in a way that, forgive my language, forces Congress to understand. We now have an army of people that can communicate with Congress and the media. The question now is how to most effectively deploy it.”
The “army of people” to which Roth referred was explained by Keith Kelly, FSI’s executive vice president and COO, who is responsible for membership growth.
“Engagement is a key to growth,” Kelly said. “We’ve has significant growth in both numbers
David Bellaire, FSI's general counsel and director of government affairs, specifically described a recent letter writing campaign from more than 5,000 advisors to President Obama objecting to the Department of Labor’s proposal of a fiduciary rule for IRAs and meetings between Congress and members in a “day of advocacy” that resulted in letters from 136 members of Congress that resulted in the postponement of the DOL’s proposal. "We had basically no relationship with the Department of Labor," Bellaire said, "now they're reaching out to us as they do their cost-benefit analysis" on the proposed IRA fiduciary rule. While other industry groups are meeting today with DOL, he said FSI will have its own meeting with the Department on Friday.
“We also believe very heavily that a single self-regulatory organization should be given the responsibility to ensure a level playing field for advisors and to make sure someone is ensuring that advisors live up to their fiduciary responsibility,” he said, before noting the organization believes FINRA is best suited to that role.
He then mentioned the organization advocacy at the state level, specifically pointing to success in California with protecting the advisors’ independent contractor status and branch office registration and regulation.
“The board has given us the necessary resources to add staff,” said Bellaire. He noted the lobbyist and two lawyers currently on FSI's staff, and said administrative positions will be added to “free up the professionals’ time.” He also said a taxation and retirement team is in the process of being developed, and one lobbyist will be added there. Lastly, he mentioned that lobbying firms have been retained in Florida and California, which he said are “bellwether states” that begin many regulatory trends, and where the organization has the highest concentrations of both member firms and advisors.
When asked about the increase in budget to accommodate the resources, Brown mentioned that the organization’s budget was $4 million in 2011 and is $5 million in 2012. Of the $1 million dollar increase, 60% to 65% will be applied to the new resources, according to Brown.
When asked about the significant rise in advisor membership numbers in what has arguably been a tough economic environment, Brown explained that 40 firms were partnering with the
When questioned directly about the strategy and the number of advisors they expected to retain, Roth explained the “opt-out strategy” he employs at Advisor Group, the BD network firm he heads. Kelly said the retention rate is currently 74%, year-over-year, although he added that percentage does not yet include the subsidized members.
When asked how it positions themselves in relation to other advocacy organizations, Brown responded that FSI will “always have advocacy as its core mission, unless we strike gold and regulators gain sanity.”
Kelly added that the organization has underserved its members in not promoting the value of the “brain trust” it has assembled.
“Our value proposition as advisors is independence,” Russo also added. “We all know about wirehouses and pushing proprietary products and quotas. We don’t have that. We want to serve middle America, and what the DOL tried to do with the IRA rule would have taken a fee of $1,700 on a $100,000 account that took the client 45 years to build, and increased it to $9,600. I don’t think they wanted to destroy that access to advice, but I would have had to call my clients and say, “I’m sorry, I can no longer service you IRA account.”
Brown said the power of the business model was not new, noting it’d been in place for 30 years and at its core, it’s client-focused.
“The advisor is a business owner, an entrepreneur and a member of the community,” he explained. "They’re here to help clients achieve their clients’ financial goals and partner with an independent financial services firm in the process. We didn’t contribute to the financial crisis.”
When challenged on his last point, noting the trouble recently experienced by some FSI member firms in relation to Medical Capital, Provident Royalty and Tenants-in-Common products now the subject of lawsuits, Brown said the organization and members were continually discussing methods for ensuring future product compliance and advisor oversight.
“FSI’s mission grew out of the late-1980s" when broker-dealers were facing problems involving real estate limited partnerships, he recalled. “Larry [Roth] remembers this. It was members of the industry that got together and said, ‘We’ve got to ensure this doesn’t happen again.’ Members have learned from those challenges about how to improve and grow.”
Read more AdvisorOne articles on FSI OneVoice 2012 at our OneVoice home page.
Follow editor Jamie Green's tweets from the FSI OneVoice 2012 conference.