More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Ken Fisher’s recent interview with ThinkAdvisor certainly caught my attention. Given the fact that I’ve spent the last 17 years of my career representing the interests of SEC-registered advisory firms in Washington, DC, my first reaction was purely defensive. But I’ve calmed down and now wish to address some of Mr. Fisher’s more provocative statements. In doing so, I hope to challenge investment advisory professionals to take action to help ensure that his dire predictions do not come to fruition.
Fisher Quote 1: “The RIA world is at threat of being taken over by BDs in a regulatory sense.”
I agree. Our organization has warned of the serious legislative and regulatory threats from the broker-dealer industry and FINRA (formerly NASD) for many years. As just one example, I distinctly remember testifying at the SEC’s roundtable of investment advisory issues back in May 2000 and discussing issues relating to fiduciary duty as well as the threat of a self-regulatory organization (SRO) from NASD.
More important, we’ve done much more than just talk about it. We have written numerous comment letters and met with SEC commissioners and staff. We have testified on Capitol Hill. We have worked with state securities regulators, consumer groups and other industry groups to make our message heard. We have urged our members and other investment advisory firms to get involved in these critical policy debates. I believe that serious threats from the broker-dealer industry and FINRA still exist. But any objective analysis of the evidence would show that these threats have been out there for a long time. If it weren’t for efforts by our organization and others, the threats would have come to fruition by now.
Fisher Quote 2: “There’s a good chance that the entire RIA world is gone in 10 years.”
If Mr. Fisher is literally suggesting that the SEC-registered investment advisory universe will disappear, he’s clearly wrong. All indications, including demographics in the U.S., indicate that the demand for investment advisory services will continue to increase during the next decade. So maybe what he is saying is that the current composition of the investment advisory profession will disappear or change dramatically as more and more brokers basically appropriate and re-define the investment advisory profession.
Change is inevitable, but I still think that predicting the end of the RIA world is unlikely at best.
By the way, I’m not sure what Mr. Fisher means when he uses the term “RIA.” His firm is registered with the SEC as an investment adviser and thus is an “RIA.” I doubt that he is predicting the demise of his own firm within the coming decade, so he may be using the term “RIA” to mean something else – perhaps smaller advisory firms.
I’ll make two quick points. First, others have predicted the demise of smaller advisory firms and been proven very wrong—some of you old folks may remember the infamous Goldman Sachs-Mark Hurley study in 1995 that basically predicted that firms below $5 billion in AUM would go the way of the dinosaurs. Second, separating “RIAs” from larger investment advisory companies is one big reason that the investment advisory profession is not as effective at lobbying as the broker-dealer industry.
I absolutely agree that implementing a watered-down fiduciary duty for broker-dealers could lead to very bad results, by allowing brokers to claim the mantle of fiduciary duty without really subjecting them to core fiduciary principles. Ken Fisher may be right, but I’m not giving up the fight. he SEC has not yet initiated a rulemaking under Section 913 of the Dodd-Frank Act and, if history is a gauge, any such rulemaking will be highly controversial. We’re still a long way off from any regulatory resolution of these important issues.
Fisher Quote 4: “The RIA world doesn’t lobby very well; the BD world does.”
I agree. I have always felt that we are outgunned by the broker-dealer lobby. SIFMA and other broker-dealer trade organizations are much bigger, better organized and more powerful than we are. But it doesn’t have to be that way! If all SEC-registered investment advisory firms joined forces, we would be a very formidable force.
The fact is that most investment advisory professionals do not support organized efforts to respond to the potential threats that Mr. Fisher has identified. Some of this disorganization and apathy is due to the vast diversity among SEC-registered advisory firms. Every investment management consultant I’ve known has used the word “fragmented” to describe the advisory profession. But in spite of the fragmentation, the fact remains that all advisory firms are in the same core business of providing investment advice about securities, are subject to the Advisers Act fiduciary standard, are subject to the same SEC regulations and face serious consequences for non-compliance.
All investment advisory firms similarly have a potential upside from working together more closely. All advisory firms have a shared interest in preserving what’s good about the principles-based framework of the Advisers Act, in opposing unreasonable and inappropriate laws and regulations and in supporting efforts to bolster investor confidence.
Fisher Quote 5: “If there’s one thing the BD world would love is to have the RIA world taken over by [FINRA] – and the SEC isn’t totally opposed to that.”
I agree that the biggest threat to the current regulatory framework is the potential role of FINRA as the SRO for investment advisory firms. On June 6, 2012, I testified in opposition to legislation sponsored by Rep. Spencer Bachus (R-Ala.), the then-chairman of the House Financial Services Committee, that would have subjected thousands of investment advisory firms (primarily smaller advisory firms) to FINRA regulation, inspection, and enforcement. Thanks to the efforts of a broad coalition, including state securities regulators, consumer groups, financial planning groups as well as firms like Schwab and TD Ameritrade, we were able to defeat that initiative.
But Mr. Fisher is right: FINRA and its allies are re-grouping for yet another assault on the investment advisory profession. The question is simple. Will you stand with us when that time comes?
As always, I welcome your thoughts and feedback.