I'm reading through the message points that the Financial Services Institute has sent out to its members and after every sentence or two, I have to fight my gag reflex. For instance: "Dodd-Frank called for changes in the oversight of investment advisors and broker-dealers in order to eliminate regulatory gaps that undermine investor protections." The message says that these investor protections will be restored with the legislation cosponsored by Reps. Spencer Bachus (R-Ala.) and Carolyn Maloney (D-N.Y.) that recommends more stringent oversight of registered investment advisors under FINRA.
This is a deliberate attempt to obscure the fact that the Dodd-Frank measure was passed, not because of anything that mainstream (dually registered or otherwise) RIAs did, but because an outraged public wanted more oversight over an entirely different group of "advisors." The brokerage community had just brought the global economic system to the brink of collapse with its reckless sale of junk mortgage pools and derivative bets on them. The "regulatory gaps" the bill is addressing had nothing to do with RIAs; it was the fact that somehow the wirehouse community had been able to rake in billions while their investors suffered, and then demand taxpayer-sponsored bailouts when their own balance sheets were threatened.
Here's a good one: "From a business standpoint, retail investment advisors have an unfair advantage over independent broker-dealers, who are examined by FINRA every two years. Broker-dealers are more than willing to spend time and money preparing for and complying with these frequent examinations because they help ensure consumers are protected and have peace of mind. Yet, if RIAs do not have to spend this time with examinations, or spend the resources to show they are compliant, they gain an unfair business advantage."
If you're an RIA, did you realize that you don't have to prepare for these exams, which may arrive at any moment? Didn't anybody inform you that you're just totally footloose and compliance-free? The broker-dealers are the heroes here; they embrace more compliance-related chores on behalf of the consumer. What the memo doesn't mention is that they fight like hell to avoid having to live up to a fiduciary standard. In the fantasy world of this memorandum, consumers can have "peace of mind" knowing that their brokerage firm is watching over their best interests, supervised by these more frequent examinations. All of you RIAs are getting a free pass - which has to stop.
THE REAL COSTS
The memo says that members should tell their legislators that FSI endorses FINRA to be the SRO for RIAs, and that FINRA's estimates for the cost of FINRA regulation should be taken more seriously than the much more alarming figures in a Boston Consulting Group study. The FINRA press release endorsed so strongly here is nowhere near as detailed as the Boston Consulting report, and was released only after FINRA had refused for months to give its own estimates.
Ironically, FSI's message went out right as FINRA was raising its service fees to existing member organizations, which already feel like they're crushed under mountains of paperwork and expense. A recent article in the trade press questioned whether smaller broker-dealers will be able to survive all the busywork that they have to deal with, and I would challenge anybody to show me how consumers are any safer as a result.
I think we all know that FINRA regulation of RIA activities would be pretty darned expensive. If you harbor any other expectation, I suggest you have an off-the-record conversation with any senior executive at any independent broker-dealer.
But my larger point centers on why this cynical memo bothers me so much. The RIA community had nothing to do with the ugly problems in 2008, not even Bernie Madoff, who was an NASD (as FINRA was known then) board member, who was regulated by FINRA for his entire Ponzi career. The RIA community has a squeaky-clean record compared with the brokerage operations, in part because the RIA community is held to a higher legal standard, one that any person who wants to cheat his customers will think twice about embracing.
Perhaps most important, the independent broker-dealers were not part of these scandals either. And yet their trade organization is trying, with uncommon persistence, to bring the regulatory organization that threatens their own viability ever deeper into the lives of their affiliated advisors. Why?
It has always been clear to me that FINRA exists to benefit the larger brokerage firms, and its rules and regulations and enforcement are used to create an environment where anybody who competes with the likes of BofA Merrill Lynch, Morgan Stanley, etc., has to do so under duress. FINRA has been an effective bludgeon against the small independent B-D world, creating paperwork requirements whose costs are best amortized over larger hordes of retail advisors. The organization routinely prosecutes and punishes smaller B-D executives for activities far less damaging than all the stuff the brokerage firms did leading up to 2008. The brokerage executives are never prosecuted directly, and their firms, unlike the smaller B-Ds whenever they commit a foot-fault or trip over yet another regulatory hurdle, never have to admit guilt for what they did.
Why do FSI members not protest when their trade organization lobbies on behalf of FINRA? There are tens of thousands of advisors who have been signed up by their B-Ds, who have FSI dues deducted automatically from their payout unless they affirmatively ask not to be put on the list. Their RIA practices would be harmed by more intrusive FINRA regulation. FSI waves them around as strong supporters of its policies when it talks with people in Congress. Do all of you, who have become de facto members of FSI, agree that FINRA would be the ideal organization to protect the public from your activities? If not, shouldn't you ask your B-D not to register you?
And what about FSI's independent broker-dealer members? Why do they support expanded regulatory authority for the organization that has consistently put them at a disadvantage to the brokerage firms? Why don't they protest? Despite FINRA oversight that imposes a sales culture, many of them still manage to operate under a fiduciary standard. Why are they taking the other side in FSI's fight against fiduciary? Are they comfortable taking sides with the brokerage firms that (as they know) would extinguish them at the first opportunity?
This disingenuous, sly message giving members the best ways to praise FINRA regulation made me angry, and not because I have a personal ax to grind. FINRA isn't in danger of regulating me.
This memo, and FSI lobbying policy on this issue, seems to me to be harmful to many important members of the financial planning/financial services community — and to many of FSI's own members. I'm angry because a lot of great people, and great companies, are being taken down a path that we all know will not end well for their future viability and well-being, and certainly not for the consumers who rely on them for advice and guidance.
Dually registered advisors and the independent broker-dealer community that supports them deserve a lot better leadership than they're getting. The people I know in that world have never, before now, dealt in sly half-truths. They always defined the way they operate in clear and direct contrast to the wirehouse model. In my view, FSI has consistently failed to put its members' interests first in this regulatory debate, and has done nothing to benefit consumers, either. I hope those members will find the courage to speak out to the FSI leadership and staff.
If they do, it will be from the heart. They won't need anybody's message points to tell them what to say.
Bob Veres, a Financial Planning columnist, edits and publishes the Inside Information website and newsletter for advisors at bobveres.com.
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