FINRA is substantially underestimating the costs to set up a self-regulatory organization for investment advisors, according to a review by an outside consulting firm. In response, FINRA says the review should be viewed with “skepticism and amusement.”

The Boston Consulting Group review is the latest salvo from the Financial Planning Coalition – comprised of FPA, NAPFA, and CFP Board – in its efforts to have lawmakers authorize the SEC and not FINRA to collect user fees to pay for increased investment advisor examinations. The review also was sponsored by the Investment Adviser Association and TD Ameritrade Institutional.

Last year, the coalition released a study conducted by Boston Consulting Group estimating high costs if FINRA were to become the SRO: $200 million to $250 million in startup costs and $460 million to $510 million for ongoing operations. The coalition says these expenses could be passed on to advisors in annual fees to the tune of $51,700, or much more, per firm, depending on its size. By comparison, FINRA recently released a two-page document with much lower estimates: $12 to $15 million in startup costs versus $150 to $155 million in ongoing operating costs. The new review comes in response to these FINRA numbers.

“They have left out important accounting of costs,” Marilyn Mohrman-Gillis, the CFP Board’s managing director of public policy and communications, said as she was on her way to meetings on the matter with members of the U.S. House of Representatives Financial Services Committee. “It would seem to us that they are drawing on their existing oversight operation. This raises concerns that a FINRA SRO would be truly independent.”

House Financial Services Committee Chairman Spencer Bachus (R-AL) introduced legislation last month in the house that could clear the way for FINRA to become the self-regulatory organization for retail investment advisors. The bill is cosponsored by Rep. Carolyn McCarthy (D-NY). The Bachus-McCarthy bill would authorize one or more self-regulatory organizations (SROs) for investment advisers funded by membership fees.

FINRA released its cost estimates on April 25, the same day that the bipartisan bill was introduced. The authority also has retained powerful lobbyist Michael Oxley, of Sarbannes-Oxley fame, to rally support for it to take over SRO functions.

FINRA says the Boston Consulting Group's new review is inventing numbers out of thin air. “[U]ntil the Boston Consulting Group has at least one conversation with the SEC and FINRA about what it takes to run a nationwide examination program, their numbers should be viewed with skepticism and amusement,” FINRA Spokeswoman Nancy Condon said in an email.

There’s a reason why BCG didn’t contact FINRA or the SEC, according to Skip Schweiss, managing director of Advisor Advocacy for TD Ameritrade Institutional. “My sense is that the Boston Consulting Group wanted to go about its analysis using less partisan numbers and inputs and I think this is why they didn’t consult with FINRA on this,” says The study says it relied on publicly available numbers in making its cost estimates.

Unlike other custodial firms, Schweiss says TD Ameritrade decided to enter the debate by helping to commission the Boston Consulting Group study in December, and subsequent review, in order to get some hard and objective data to inform all parties affected.

“We jumped in because this is an issue of direct impact to our 4,000 investment advisory firms around the country as to how they are regulated and they tell us that this is a very important issue to them,” Schweiss says. The specter of very high annual advisor fees would impose meaningful expenses on small firms, he added. “It’s just a heavy regulatory and expense burden on what we all know these advisory firms are which is small businesses.”

Chris Paulitz, the managing director of communications and media relations at the Financial Services Institute has said that FINRA is the only logical choice for an SRO, given that it’s highly unlikely in the current political environment that the SEC will be adequately funded to sufficiently regulate advisors. With a FINRA SRO, at least many more advisors will be regulated going forward, according to Paulitz.

"Instituting even basic RIA examinations will level the playing field for all advisors, protect consumers and help RIAs flourish as trust is gained in their business model,” Paulitz said today, although he did not address the question of the costs to advisors.

Specifically, the Boston Consulting Group review finds that:

•FINRA's estimate omits the cost of SEC oversight ($90 to $100 million) and the cost of enforcement ($60 to $70 million), both of which are required by the legislation;

•FINRA's estimate of $12 to $15 million in setup costs does not include staff costs incurred during the 12-month setup period, specifically the cost of examiners and support staff. FINRA only includes these expenses as part of its ongoing investment once the SRO is up and running. This omission accounts for $180 to $230 million of the difference between the BCG and FINRA estimates;

•FINRA's estimate of the ongoing annual cost of examining 14,500 IA firms once every four years assumes that FINRA's IA examiners would be able to nearly double the productivity rate of SEC IA examiners, by performing five or more examinations per examiner per year. This compares to SEC IA examiner productivity of three, and FINRA broker-dealer examiner productivity of 2.8. This productivity assumption accounts for $150 to $170 million of the difference between the BCG and FINRA estimates; and

•FINRA's estimate does not include overhead costs in its estimate of $150 to $155 million of ongoing annual investment. Overhead costs account for $135 to $140 million of the difference between the BCG and FINRA estimates.

A side by side comparison of the cost estimates can be found here