I may be opening up an old wound here, and if I am, I hope you'll forgive me. But I find myself wondering about all the ways that the interests of a broker-dealer differ from the interests of its affiliated advisors. I've never seen this explored anywhere.
For instance? To take a simple example, the BD incentive is for all of its advisors to bring in as much business as possible; volume means incremental extra revenues. But for the advisory firm, the business needs to be profitable. Taking on a lot of small high-maintenance clients is not a great business model. And many advisors want to run lifestyle practices, growing to a certain size and then focusing on client service.
Compliance is another example. The BD is the deep pocket when a client becomes angry, so it makes sense for the firm to impose very stringent controls on what its advisors can do or say. The advisor, meanwhile, wants the flexibility to communicate with clients and the community like an adult, like a professional. In my experience, most advisors understand the rules, and chafe at the blanket of supervision--and, often, revision--that is imposed on everything that goes out the door.
If there's a serious client dispute, the broker-dealer has an incentive to declare that the advisor is a "rogue" rep; that the advisor is the problem, not the BD.
The advisor wants ACATS transfers out of one BD to another to proceed smoothly and quickly. The BD has an incentive to hang onto the funds and impose additional nickel and dime fees on the money passing outside its revenue structure.
BDs that are affiliated with insurance companies have an incentive to promote their product lines over all others. Advisors want to choose what's best for their clients. Advisors want BDs to create powerful technology platforms and hire the best support staff money can buy. The BD has an incentive to watch those costs.
And finally, when it comes to lobbying, there seems to me to be a built-in discrepancy in incentives. Broker-dealers are comfortable with FIRNA as their regulatory body -- or, at least, that's the consistent message that I get from the Financial Services Institute, which is lobbying hard to get FINRA the additional responsibility of supervising RIA activities. Most of the advisors I talk with prefer a straightforward principles-based regulatory scheme to one that proliferates endless rules and gives a lot of authority to the compliance department.
I think we all know there are conflicts everywhere, and not all of these conflicts are acted on in all or even most cases. Compared with the brokerage or insurance worlds, where the people in the field have to openly battle their home offices, these conflicts look pretty tame -- and in general, the relationship between advisors and their BD home offices has been pretty harmonious.
But it makes me wonder several things. First, is this a complete inventory of the conflicts of interest, or are there others I'm not aware of?
Second: should dually-registered advisors rely on the Financial Services Institute to represent their interests in Congress and with regulators, when nearly all of these conflicts are subject to being spun in favor of the broker-dealer home offices? Or should they be lobbying separately, or through one of the organizations that favors principles-based regulation?
What do you think?
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