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Back in 1999, Mark Hurley (then founder and CEO of Undiscovered Managers Funds, and now founder and CEO of Fiduciary Network) wrote a highly acclaimed research report about the future of independent financial advice, which he updated in 2005. Both Hurley Reports, as they became known, asserted among other things that the advisory industry would undergo a consolidation which would ultimately result in the creation of 40 to 50 mega-RIA firms, which, with $15 billion to $20 billion or more in client AUM, would dominate the industry. The driving force behind this consolidation, contended Hurley (a former Goldman Sachs investment banker), would be the combination of higher market valuations of larger pools of client assets and a large—and growing—pool of potential clients that could be more readily attracted with larger marketing budgets.
Of course, Mark’s predicted consolidation hasn’t taken place—yet—but we have seen significant industry evolution in that direction: Today, there are more than two dozen advisory firms with over $1 billion in AUM, a figure what was virtually inconceivable a decade or so ago. It’s also fair to say that both the Dot.com crash and the Mortgage Meltdown, followed by the Great Recession, undoubtedly slowed down his timetable. Yet, to my mind, Hurley’s consolidation is about to get a massive HGH injection from an unpredicted source: the reregulation of RIAs.
After last week’s hearing of the House Financial Services Committee, it seems likely that theSpencer Bachus bill, designating FINRA as the regulator of RIAs, taking over those duties from an over-extended and underfunded SEC, will move out of Committee.
And, as it seems equally likely that the Republicans will retain control of the House and maybe gain control of the Senate in November, FINRA has a better than even chance of achieving that long-sought goal (even, as seems likely now, if the Bachus bill doesn’t get to a House Financial Services Committee vote or to the House floor until after the election).
That means that RIA compliance costs are likely to be going up. How much? If you remember, four months ago, the Boston Consulting Group issued a independent study of the costs involved, concluding FINRA’s estimates were extremely optimistic—at least by half. Then last week, the Massachusetts Securities Division conducted an online survey of RIAs, in which 41% said that FINRA regulation would likely put them out of business. Perhaps a bit of an over-reaction, but the Massachusetts survey seems to capture the fears of RIAs everywhere.
While I certainly agree that FINRA oversight would be, in the short term, a bad thing for independent RIAs specifically and for financial consumers generally, I suspect over the long haul it might actually backfire on the securities industry. (Contrary to Dale Brown’s contention that FINRA is an “independent,” regulator, wasn’t it, until lately, called the National Association of Securities Dealers?) Rather than put RIAs out of business, sky-rocketing regulatory costs will more likely greatly accelerate the consolidation that Mark Hurley foresaw 13 years ago. A possible result would be the emergence of those mega-advisory firms that have the financial muscle to both stand up to FINRA and market regionally and even nationally—and the institutional gravitas to attract clients away from wirehouses in a flood that will make today’s defections look like a trickle.
I realize that’s not the end game that many independent advisors are looking for. But given the likely alternatives today, it could be a lot worse.