More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
I don’t normally applaud AdvisorOne’s coverage, due to my obvious bias, but Melanie Waddell’s Feb. 7 article “FINRA Shifts SRO Fight to Senate” is worthy of exception, both because the congressional debate over RIA regulation is an important issue, and because as far as I can tell, all the other media outlets covering the advisor space seem to have gotten the story wrong.
While Financial-Planning.com announced “FINRA Drops Bid to Regulate RIAs” (Feb. 7) and Investment News.com reported “FINRA Calls Ceasefire on RIA Oversight” (Feb. 7), only Melanie seemed to have understood FINRA CEO Richard Ketchum correctly when he said in a Feb. 6 Reuters interview: “We’re realistic enough to know that there doesn’t appear to be a strong momentum to move forward in Congress [on an RIA SRO].”
In fairness, references to our national legislators can be a bit confusing. The word “Congress” is sometimes used to refer to both houses of Congress: the House of Representatives and the Senate. Yet inside the Washington D.C. beltway, where the RIA reregulation drama is being played out, “Congress” invariably refers to the House (whose members are called congressmen and congresswomen), while the “Senate” refers to, well, the Senate. So, when Mr. Ketchum told Reuters “I’m not a big believer in banging a head [sic] against the wall; we’ll focus on things we can impact,” when combined with his earlier quote, it may have sounded as if FINRA was moving its bid to become the SRO for RIAs onto the back burner.
But what Ketchum really meant, as Melanie reported, was “FINRA would forgo, for now, its attempts to get the House Financial Services Committee to revisit this year Bachus’ SRO bill.” Then she went on to quote various sources, including Ron Rhoades, who pointed out that “FINRA has been trying for several months to quietly obtain sponsors for an SRO bill in the Senate, rather than in the House.” Rather than throwing in the towel, it seems that FINRA has simply shifted the fight to a new venue.
The broker-dealer SRO, it seems, has set it sights on a new strategy: garnering bipartisan support in the Senate for its oversight of RIAs, under the notion that Republicans in Congress (the House) will be too distracted with other things (such as the federal deficit) to put up much of a fight, and will simply fall in line. FINRA is nothing if not resourceful.
If this seems to be a bit of a desperate plan, after having gone “all in” with its attempt to get its SRO bill through the House Financial Services committee, I’m guessing it probably is. FINRA—both recently and in its former life as the National Association of Securities Dealers—has a history of being better at recognizing genuine threats to the brokerage business than it has been at doing something about them.
Back in the 1980s, the NASD perceived that client-centered financial planning posed a threat to the sale of securities (incorrectly, as it turned out). The then-fractured planning world quickly came together to form what’s now called the CFP Board, to own the CFP mark, and the NASD’s attempts to regulate financial planning were thwarted.
Then, in the 1990s, the newly renamed FINRA (after its merger with NYSE Regulation) saw an even greater threat (correctly, this time) in the emerging business model of managing client assets for a fee. It failed first in its attempt to prevent brokers from getting in on the fee-based action, and then again in 2004 when the FPA lawsuit prevented it (through the SEC) from exempting fee advice from the client protections of the Investment Advisers Act.
To my mind, FINRA’s current attempt to regulate RIAs is a not even a thinly veiled try to protect the brokerage business model from being replaced by independently managed client assets.
We can debate whether levying fees on AUM is more or less client-centered than the brokerage sales model, but there isn’t much question that it’s better business. Brokers are leaving wirehouses in swarms these days for one simple reason: economics. According to FP Transitions and others, advisory firms that generate their revenues from fees on client AUM are fetching purchase prices between three and four times revenues.
That means an independent practice generating $2 million in revenues will sell for between $6 million and $8 million. That’s real money—and an exit payday that wirehouses can’t hope to match. But the added burden of FINRA regulation could certainly make independent advice a lot less attractive.