A few columns ago, I asked advisors to give me the most ridiculous stories about their SEC audit experience, and the answers made it clear that the inspectors and enforcement people at the SEC are not totally focused on the safety of investors, so much as finding fussy little foot-faults that they can write up to justify their existence. Many people wrote back to say that I should have included FINRA inspections in my little contest, and provided not just ridiculous stories, but also tales of mean-spirited enforcement and bullying, which seems to have had nothing to do with investor protection.

There's a point to this exercise.  Ideally, the SEC and FINRA would have a system in place that does two things:

1. Find out, quickly, whether an advisor is stealing client money or making harmful recommendations or misrepresenting him/herself to the public--in other words, whether this person is damaging the financial lives of clients.

2. Encourage the advisory profession to raise its standards of conduct and practice and service levels--which independent advisors have been doing, largely on their own, for the past 25 years.  That means, at a minimum, not imposing unnecessary regulatory burdens and forcing advisors to take a lot of time away from clients to fill out paperwork and navigate bureaucratic channels.  It means becoming more efficient and effective in the audit process.

And it may mean focusing more resources on the firms that embrace conflicts of interest in their dealings with customers.  I would argue that an independent advisor who simply creates an asset allocation of mutual funds and ETFs, for an AUM fee, represents less potential for harm than somebody who represents a large brokerage firm that manufactures the investment and insurance products that the representative recommends to clients.  I say "potential" for harm because that representative may be acting in the best interest of clients, just like the independent advisor is.  My point is that the incentives at the larger firm to sell the house product have more potential to lead to non-client-driven recommendations than the absence of them.

Which brings me (finally) to the discussion point.  We've pointed out that the current SEC inspection and audit process is kind of silly, at best, and a waste of resources, at worst.  FINRA's process, from what I've been told, makes even less sense.  If I were in their shoes, I would follow up with a plausible question: Okay, profession, how would YOU handle the inspection and audit process?  What procedures would YOU recommend that we do when we come into your offices, to make sure you're not another Bernie Madoff?

And those are my questions.  When that SEC or FINRA inspector knocks on your door, what questions should they ask, what should they look for, what should they look AT, and how long do you think this process should take?  Meanwhile, what can they encourage you to do so the whole inspection process becomes less difficult for them and less painful for you?

I think the idealistic members of the advisory profession and the SEC (and maybe even FINRA) really, at bottom, share the same goal: they want consumers to be protected and well-served.  How can the two sides work together to make this inspection process work better and more efficiently?

What do you think?


For more on planning, client service, practice management and marketing, or to join the Inside Information community, contact Bob Veres at Bob@BobVeres.com or go to www.bobveres.com.

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