In my last blog for AdvisorOne, I wrote about the Congressional Republicans holding up an SEC funding increase for lack of enforcement performance. I further suggested that the second shoe to fall in this pair of bizarro Topsiders was the SEC stepping up its efforts to enforce investment advisor regulations at a time when Congress and the Commission are allegedly focusing on how to institute an RIA-like fiduciary standard for brokers, as mandated by Dodd-Frank. Can we hold up all Federal salaries in Washington for lack of performance?
Apparently, the Congressional threat to withhold SEC funding is having the desired effect. As reported by AdvisorOne’s Melanie Waddell on March 8, at the Investment Adviser Association’s annual compliance conference, the deputy director of the SEC’s Division of Investment Management Robert Plaze, warned chief compliance officers that the newly created Asset Management Unit “is dedicated to suing you.” Then, Sean McKessy, chief of the SEC’s newly formed Office of the Whistleblower, told attendees “that his office is receiving tips and complaints about advisors.”
Why the crackdown on RIAs? A cynical mind might conclude that for (insert your reason here), House Republicans are giving way too much credence to SIFMA’s contention that, despite the Treasury Department’s original financial reregulation assertion that public protection requires a broker fiduciary standard, the real problem here is “under-regulated” investment advisors. If true, it’s an impressive piece of strategic sleight-of-hand, which looks to turn a consumer protection slam-dunk into regulating independent advisors out of business, with or without FINRA oversight.
Yet the success or failure of this regulatory fantasy rest upon the extent to which the Congressional Republicans, and anyone else who goes along with it, can continue to ignore reality. On the off chance that anyone is actually interested in the facts, here’s a modest attempt to interject a dose of reality into the discussion.
First, let’s look at the relative sizes of the broker universe and RIAs. According to Cerulli & Associates, at the end of 2010, there were 50,200 brokers on Wall Street working in retail sales/advisory positions vs. 41,500 RIAs and dually registered broker/RIAs. The Tower Group tells us that during the five year period from 2005 to 2010, the number of wirehouse brokers fell some 20%, while the number of RIAs increased 66%; so based on recent reports of the continuing defection of breakaway brokers, it’s a fair assumption that the number of brokers and dually registered advisors today is even closer than the Cerulli figures indicated.