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May 15, 2015 at 05:27 AM
In a wide-ranging session at the Envestnet Advisor Summit in Chicago on April 8, MarketCounsel’s founder and CEO Brian Hamburger addressed many of the big regulatory and compliance issues facing advisors, and that one of the main issues is the regulators themselves.
The SEC “hasn’t been doing its job for a long time. We haven’t had a strong securities regulator in the last 15 years,” he said in the breakout session, which included fiduciary standard advocate Knut Rostad in the audience. That weakness by the federal securities regulator is why on the fiduciary standard for brokers, the SEC has decided “we won’t be able to address this.”
Hamburger said that looking at the broader picture of financial services regulation, “a real battle is being waged here,” with the intent to deliver “overall harmonization” of RIA and broker regulation. “’Harmonization’ sounds nice. Who doesn’t want ‘harmony?’” Hamburger joked, but warned that for RIAs harmonization is not a good development. It’s also not good for end clients. “Customers are confused,” he said, not knowing if they’re “dealing with a broker or advisor,” and moreover, “don’t know what difference it makes.”
While the fiduciary reproposal from the Department of Labor “gets the headlines,” the harmonization push “is starting to roll a rock down the hill.” If RIAs back a fiduciary standard for brokers, they have to be ready for the drawbacks of harmonization. That would include “taking all the rules BDs are subject to and applying them” to RIAs, including a continuing education requirement, reviews of advertising and books and records requirements. Harmonization, he said “is not a one-way street.”
In fact, he argued that “if you align all of these things, I can assure you that FINRA will reappear quickly” and say regarding RIAs, “if they’re all subject to the same rules, it makes sense for us to examine them.”
By contrast, he said the United Kingdom dealt with this issue “years ago,” to the point that as of this year, each advice giver “must decide whether you’re a broker or an advisor,” and based on that decision, “your registration will be different” as will “your standard of care” toward clients. That makes it easier for British end clients to decide whether they “need incidental advice, or a more conflict-free form of advice.”
On the fiduciary standard for brokers, Hamburger recalled that the original “Merrill Lynch Rule” really wasn’t an SEC rule at all, with the more accurately named broker-dealer exemption originally proposed by the brokerage industry as a “way to cure churning.” That industry figured out, however, that “since customers wanted advice,” they could charge a fee for their brokerage services that would “look and feel a lot like the way investment advisors charge.” The brokerage industry’s intent was reflected in its advertising at the time. “The ads back then didn’t talk about the quality of their clearing,” Hamburger recalled, “but about advice.” (That exemption was successfully challenged in court by the Financial Planning Association.)
