Advisors have their eyes on Washington these days–and well they should, as the nation’s capital is rife with regulations from Congress and the Securities and Exchange Commission that may make advisors’ lives easier, or not.
The SEC has added some new items to its examination checklist of late, and is scrutinizing the information advisors are disclosing on Form ADV, the accuracy of their performance numbers, their best execution and soft-dollar arrangements, and the suitability of their recommendations to clients, as well as their use of hedge funds. While the SEC claims that keeping a watchful eye on these areas is tantamount to protecting investors’ interests, some advisors are taking issue with the usefulness of the Form ADV and the lack of clear guidance on how to comply with best execution standards.
Also on advisors’ regulatory radar screens is the pension reform bill, which passed the House on April 11 by a 255-to-163 vote and includes the controversial investment advice legislation sponsored by Representative John Boehner (R-OH). Independent advisors have been up in arms over the idea that a 401(k) administrator would be allowed to dole out potentially biased advice to plan participants.
The advice bill has many hills to climb before it becomes law; the bill was pushed through the House by Republicans with a healthy majority, but has many detractors in the Senate. Should it become law, it would heat up the competition for retirement dollars among independent planners, investment companies, and life insurance companies. Lawmakers are attempting to avert another Enron disaster by including the advice provision, as well as other post-Enron provisions modeled after President Bush’s pension overhaul. The provisions allow workers to sell employer-matched stock in their 401(k) after three years and stipulate that employees must be informed before any account changes occur.
Donna Skeels Cygan, a planner with Essential Financial Planning, Inc., in Albuquerque, New Mexico, says she’s become particularly concerned about how Fidelity handles its 401(k) relationship with Sandia National Laboratories, one of the largest employers in Albuquerque. “Fidelity sends the employees enormous amounts of information about how they should have all of their personal assets at Fidelity, how they can roll their 401(k) into an IRA at Fidelity when they retire, and how wonderful their 529 plan is, et cetera,” Cygan says. “Fidelity provides seminars at Sandia for Lab employees during lunch hour about lots of different topics, not only 401(k)s, and definitely has a captive audience. I am unclear on just where Fidelity is supposed to draw the line between administering the 401(k) plan and taking advantage of having their foot in the door to provide seminars that are anything but objective.”
Senator Jeff Bingaman (D-NM), is sponsoring a bill in the Senate that champions independent advisors’ call to limit 401(k) advice to only “independent parties.” But that doesn’t sit well with Jack Dolan, spokesman for the American Council of Life Insurers. “The idea of ‘independent’ is suspect. [Life insurance and investment companies] are providing investment options and educational materials, so we are the ones best equipped to provide advice,” he argues. “The Bingaman bill would stifle competition.”
The Nifty Thrifty
Another bill that’s causing a stir in the planning industry is H.R. 3951, the Financial Services Regulatory Relief Act of 2002, which includes a provision exempting thrifts from the Investment Advisers Act of 1940. “Under the exemption, thrift employees could be bank tellers one day and investment advisors the next day without disclosure of qualifications, disciplinary histories, or conflicts of interests,” says C. Bradley Bond, a planner with C.B. Bond Financial Planning, Inc., in Murrysville, Pennsylvania.
In a recent letter to Congresswoman Melissa Hart (R-PA), Bond says that it’s unfair to exempt thrifts from the Investment Advisers Act when, unlike banks and broker/dealers, heavily regulated investment advisors are still prohibited from advertising client testimonials. It’s also unfair, he says, that SEC-registered advisors have to undergo SEC exams every five years, and “that advisors have recently been required to pay from $100 to $800 annually to be registered on a new Internet database, the Investment Adviser Registration Depository (IARD), with the SEC or state securities commissioners” when the Office of Thrift Supervision (OTS) “doesn’t have any experience or resources to audit a thrift’s retail advisory activities.”
Much Ado over ADVs
Lou Stanasolovich, a planner with Legend Financial Advisors in Pittsburgh, says the information advisors must provide on Form ADV is “useless” to clients. “It talks about how much money we manage, but it doesn’t tell a client how we charge, and how we treat clients in certain situations or how we bill. That might be in [ADV] Part 2 that’s coming.”