Financial Planning columnist Bob Veres wrote in this month’s issue that “RIAs are facing a grave threat to their businesses. … The SEC and FINRA have responded to criticism over missing some famous, large-scale frauds by jumping ever harder on advisors who played no role at all in that ugly sequence of mistakes. Small fiduciary RIAs are suffering most from the consequences of the scandals. And we all know it's going to get much, much worse if FINRA takes over RIA regulation.”
Following the legislative proposal out of Washington on Wednesday that could clear the way for FINRA to regulate the advisory industry, Veres tells me: “What I found most interesting about the press release that accompanied the Bachus/McCarthy bill is its strong implication that the brokerage industry is the much safer advisory alternative for consumers, and that the RIAs are the dangerous rogue element in the profession. ‘Customers may not understand the different titles that investment professionals use but they do believe that “someone” is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change,’ Bachus said.

But as Veres sees it, “I don't think anybody is fooled here. This echoes precisely the lobbying position of SIFMA and FINRA, who have in the past simply dismissed independent, fee-compensated RIAs as ‘rogue brokers.’  When you look up where the lobbying money has gone, you find that Rep. Bachus's top 10 contributors include commercial banks (a total of $213,650 in 2011-12), insurance companies ($191,010), securities and investment firms ($184,277), finance/credit companies ($90,438) and "miscellaneous finance" ($89,250).  In the 2011-12 election cycle, he was the No. 1 fundraiser from commercial banks, finance/credit companies, and mortgage bankers and brokers.”  (The source for that information is the Center for Responsive Politics, a nonpartisan research group.)  

Veres continues, “The transparent goal here, funded with huge lobbying dollars from the brokerage industry, is to get RIA regulation in the hands of FINRA as quickly as possible. That, in turn, would do a terrific job of advancing the brokerage industry's competitive position against the pesky fiduciary competition, by creating a hostile environment for fiduciary RIAs, bury them miles deep in compliance requirements, and then vigorously enforce any inadvertent foot-fault as a way of tarnishing the advisor's reputation compared with the good guys at that brokerage office up the street.”
How high are the stakes? “I happen to think,” Veres says, “that this legislative battle, and the battle for the hearts and minds of the SEC regulators who will eventually appoint and supervise an SRO if this bill is ever passed, is a do or die event for the fiduciary financial planning community. That, to me, is not hype; there seems to be a real danger that FINRA is carefully placing itself in position to suppress or extinguish the availability of fiduciary, client-first advice in the investment advisory marketplace. If advisors are not motivated by their own survival to battle this initiative, then I would hope they would be motivated on behalf of their clients and financial consumers everywhere.”

What’s likely to happen next? Veres says for independent advisors, “the question is how to battle” the proposal. He advocates advisors contacting their representatives to “tell them that this is a terrible piece of legislation for small businesses in their district. Beyond that,” adds Veres, who also edits and publishes the Inside Information website and newsletter for advisors at, “I think the advisory profession needs to come up with a realistic regulatory alternative that would improve on the consumer protection processes we have in place today. My Inside Information audience is brainstorming specific proposals, and I know that the Self-Regulatory Organization for Independent Investment Advisers is also looking at possible ways to create a more advanced, 21st century regulatory structure. If we let this happen to the fiduciary RIA profession, without a back-to-the-walls fight, we have only ourselves to blame.”

In a presidential election year, with the economy and Wall Street sure to be center stage in the months to come, I think we should expect a prolonged battle over this SRO proposal.

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