The Jaws of Defeat

During the debate about the reregulation of advisors and brokers initiated by Dodd-Frank, this concept of being “business model neutral” has been used by pro-Wall Street proponents (both in and outside of the Commission) to support a watered-down version of a fiduciary standard for brokers, so as not to impair their ability to conduct business as usual. Ironically, in the discussion of increased regulation for investment advisors, business model neutral has become a two-edged sword: Now it’s an argument in support of carefully considering any changes in the regulation of RIAs, many of whom practice in firms that are small businesses, which are very sensitive to any increases in costs, such as additional regulation. As many others have noted, it’s very likely that many independent RIA firms would not survive the financial burden of a FINRA-style bureaucratic regulatory structure.

As I mentioned, this isn’t the first time the securities industry has tried to gain control of the financial planning and advisory world through FINRA. Years ago, its motivation was the (quite astutely) perceived threat that the fledgling financial planning movement represented a more powerful way to distribute financial products than the traditional brokerage model. Today, the threat is independence.

With brokers breaking away from brokerage firms in droves to form their own RIA firms, Wall Street appears on the verge of panic. This time the threat is far more acute. In years past, the brokerage firms could write off defectors as unsuccessful brokers. In the ‘80s, the IAFP (the forerunner of the FPA) was known on Wall Street as the International Association of Failed Producers. Not anymore—today’s breakaway brokers tend to be top producers with hundreds of millions, if not billions, of client assets under management. To my mind, FINRA’s current usurpation of the Dodd-Frank mandated fiduciary standard for brokers and the “harmonization” of advisor regulation to gain control of the independent advisory industry is a transparent attempt to stop these defections by eliminating the independent alternative.

Rather than creating an opportunity for FINRA to finally gain control of independent advice, the Great Recession, which began in 2007, may have simply accelerated the inevitable decline of the retail brokerage model. The resulting, well-documented loss of confidence in Wall Street by the public, combined with increased awareness of the lack of fiduciary protections for brokerage clients, might have finally shifted public sentiment in favor of truly independent financial advice.

As regular readers of this column well know, I have long believed that the ability of brokers to render financial advice without the protections afforded the clients of RIAs was a mistake in the law (created by the “broker exemption” to the Investment Advisor Act of 1940). Perhaps it’s wishful thinking on my part, but my hope is that this new realization of how Wall Street works will result in a new structure for the retail financial industry, possibly even a Glass-Steagall type of division that separates firms that create, package or market financial products from firms that deliver financial advisory services to clients.

I realize it’s still a long way from here to there, from the slowing of FINRA’s “advisory SRO” momentum to the complete separation of retail advice from sales. The fact that Elisse Walter, the most pro-Wall Street commissioner, is SEC chairman, doesn’t appear to be a step in that direction. Still, if FINRA is indeed thwarted in its attempt to regulate RIAs in favor of the kinder, gentler SEC with a new mandate to collect fees to upgrade its efforts, that additional momentum might create a tipping point for the first real change in the delivery of financial advice in America in over 70 years.