Risk and uncertainty are decreasing in some important areas for wealth managers and their clients, replaced by strategic planning opportunities with clients—tax and estate planning is one example of this. Other areas are unfolding now, such as regulation, which continues to be a top risk for wealth managers, according to the Top Wealth Managers survey for 2010.

We will get another read on top risks for wealth managers in late January when we conduct the next Top Wealth Managers Pulse survey for the quarter ended Dec. 31. Registered Investment Advisors (RIAs) with $50 million or more under management are welcome to participate. Sign up for Inside Wealth (at no cost) to be notified when the survey opens. 

As the SEC releases the Dodd-Frank mandated studies affecting brokers and RIAs—an SRO for registered investment advisors, and a fiduciary standard for brokers who provide advice—it would seem that wealth managers of all stripes are facing risks that they won’t know the scope of until they see what the SEC recommends. Though this uncertainty can be uncomfortable, it is unlikely that the SEC will require firms to turn on a dime. The SEC’s rule writing, comment and adoption of final versions of rules typically proceeds at an orderly pace.

Regulatory Risks

Two risks to RIA firms and one for broker-dealers stand out, and these may change the game for investment advisors and brokers in ways we cannot currently anticipate.

One is the possibility of a self-regulatory organization (SRO) for RIA firms. Already, RIAs with less than $100 million are being required to register with states instead of the SEC. For firms that had been SEC-registered before, this will be a big change, and will shift thousands of RIA firms from SEC registration to state registration.

Having a layer of SRO regulation could be a blessing or a curse for RIA firms, depending on make-up of the new organization, who is running it and execution of self-regulatory requirements. It could result in more sharing of best practices and better education and information for a far-flung independent group of RIA firms. It could also be expensive and painful. FINRA has made it known that they’d like to be the umbrella if there is an RIA SRO, in part because they already have responsibility for regulating broker-dealers who also have RIA arms, and FINRA wants—and many would argue needs—to be able to look at both the BD and RIA sides of the business. But should that make them the best candidate for an SRO for independent RIAs?

Second, the SEC is slated to release its Fiduciary Study by Friday. This may change the course for RIA firms and even more for broker-dealers (BDs) in both obvious and subtle ways. If the study finds that there should be a single, fiduciary standard of conduct for professionals who provide advice to individual investors, this will change the culture and operations at BDs. Changing from a suitability standard to a fiduciary standard is no small feat. Organizationally this will have great challenges for BD firms, but in practice, many brokers in the field are already putting clients’ interests first, want to do this and understand that this is, over the long term, good for their business.  

Branding and Differentiation

For RIAs there’s another, less tangible risk. If the SEC calls for the fiduciary standard for all who provide advice to individual investors, does it mean that RIAs will have less to differentiate their practices? The big wirehouse banks and regional brokers are masters at branding. They are formidable in their advertising and marketing reach. What can independent RIAs do to differentiate their firms if the large firms gear up to brand themselves as operating in clients’ best interests?

For one thing, distributors of in-house product will operate differently from RIA firms that select, on a fiduciary basis, best-of-breed solutions to the needs of their clients. RIAs have had decades of practice as fiduciaries. Positioning the RIA firm and its advisors as true advocates for clients should not be difficult to do for RIA firms, and many do this already.  

The investment advisors who serve with me on The Committee for the Fiduciary Standard have advocated for this fiduciary standard because it is important to give all individual investors who want and need advice that’s in their best interest to have access to that advice. This doesn’t mean that if someone just wants to execute a trade they can't do so—it just means that if investors want and get advice, it should be, truly in their best interest, regardless of the type of firm and advisor providing it, period.

We should step back and look at all of this as the best wealth managers already do, from the perspective of: What of these regulatory changes will be in the best interests of our clients? Because in the long run, that is what will help the top wealth managers gather assets, and grow, over the long term. And this in turn will help to mitigate these risks for wealth managers.