Looks like the Financial Planning Coalition and the Investment Adviser Association have gotten attention sponsoring the Boston Consulting Group’s report, “Investment Adviser Oversight: Economic Analysis of Options.” Some of the response has been good, some not so much. Marv Tuttle, CEO of the FPA (a member of the Coalition, along with the CFP Board and NAPFA), seems to have captured the sentiment of many of the report’s supporters: “Now we have the cost context that’s been missing from the months of discussion on how to improve adviser oversight,” said Tuttle. “It’s not the only factor in trying to get to the most effective and efficient way to oversee advisers, but it’s an important consideration that’s been missing from the debate.”
The report’s detractors, however, aren’t so laudatory. FINRA, for instance, takes issue with the BCG’s projections that the cost of the brokerage regulator overseeing RIAs will be nearly twice that of continued SEC oversight with beefed up examinations ($460 million annually versus $240 million) and more than four times the $110 million a year cost of the SEC gradually increasing its inspections. “The cost projections in BG’s study of FINRA becoming the SRO for investment advisors are wildly inflated,” said FINRA Executive Vice President Howard Schloss in a statement. “The study’s methodology is flawed and now clearly explained. And the fact the Boston Consulting Group never asked to sit down with FINRA or the SEC to discuss the projected costs of IA oversight is evidence that this study was never a serious attempt to explore costs.”
There are other problems with the BCG Report, at least to my mind, even if FINRA is to be believed about the lack of contact. For one thing, there’s the conflict of interest of the CFP Board as a sponsor: I suspect the Board is even more frightened by the prospect of an RIA SRO than FINRA is (the report also projected that an investment-advisor-backed SRO would cost even more then FINRA oversight). Then there’s the issue of BCG using one set of cost projections in its report and a different set of projections for its attached advisor poll (at the time of this writing, I have been unable to get an answer from BCG on either the projections or the FINRA contact).
But none of these issues are the real story. The most telling part of Boston Consulting Group’s research comes in that attached poll of how RIAs themselves feel about FINRA oversight at virtually any cost: As you might expect, it’s not a pretty picture. And that goes for even registered reps who are dually registered as investment advisors. I suppose a charge of bias could be (and will be) made against the sponsors including the IAA—none of which are historically big fans of FINRA—but as you’ll see, despite any caterwauling by FINRA, these numbers go far beyond any messaging of the results. And there’s lot more going on here than just the question of costs.
First, here’s a quick look at what the Boston Consulting Group concluded about the cost of regulating RIAs. Using publicly available reports of their current cost structures, BCG projected cost ranges of four RIA regulatory alternatives: beefing up the SEC’s efforts (both gradually and all at once), FINRA and an RIA-supported SRO. For set-up costs, it projected the high end of each alternative as follows: $8 million for both SEC alternatives; $255 million for FINRA; and $310 million for an RIA SRO. The ongoing annual costs, including SEC oversight costs (in the case of FINRA and an RIA SRO), penciled out to be a bit more. The high end of the range for a gradual SEC improvement is $110 million a year; the immediately enhanced SEC, $270 million; FINRA, $610 million; and the RIA SRO, $670 million.
The astute observer will notice that we could gradually improve the SEC’s current RIA oversight for six years out of what it will cost to fund FINRA or an SRO for one year. The BCG report goes on to point out that to fund these costs, the current 9,440 RIAs (with more than $100 million in AUM) would be required to pay average annual fees of $11,300 for gradually improved SEC oversight; $27,300 for immediately better SEC oversight; $51,700 for FINRA; and $57,400 for an RIA SRO. Now, before you do something rash, keep in mind that these fees are only averages; undoubtedly, under each scenario the fees would be pegged to the firm size, bringing the cost down to a more manageable level for smaller firms.
That brings us to what RIAs might be feeling about all this. To provide real answers, BCG surveyed 424 RIAs, 80% of whom have less than $1 billion in AUM, and nearly half have less than $100 million. So, a pretty representative group, by my reckoning. What’s more, 25% of those surveyed are dually licensed by FINRA. Interestingly, at least to me, 86% said they followed the current debate over broker/RIA oversight at least once a month if not more often.