Conscientious Financial Planning and Retirement Income Management | 201-741-9528
from Lonier Financial Advisory LLC, Osprey, FL

Congress, Butchers, and Brokers

Congress, Butchers, and Brokers

Watch the video. It’s terrific. And then we’ll discuss.

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Video published on Mar 16, 2012 by 

This short video should give you the background you need to better understand the controversy surrounding Wednesday’s House Financial Services Committee hearing of the Bachus-McCarthy Investment Advisor Oversight Act that calls for moving oversight of investment advisers, who by law are fiduciaries, from the SEC to a self-regulatory organization—most likely FINRA, the SRO that oversees brokers, who are not.

Many people don’t realize that there are two different kinds of players in the financial services industry, who operate under different legal standards.

On the sell side, there are financial advisors, which is what stock brokers call themselves now, insurance agents, and investment agents who work for banks. Their job is to sell you financial products—stocks, bonds, mutual funds, investment programs, insurance products, annuities, and so on. They are commissioned, and what you buy affects their personal income. FINRA, an industry sponsored group that took over for the NASD, oversees broker/dealers and their agents, and enforces the suitability rule. This rule means that financial advisors need to determine that what they are selling is suitable even if not necessarily good or best for you. You are supposed to figure that out from the myriad choices available. Caveat emptor.

On the buy side—you’re the buyer—are registered investment advisers firms (RIAs), whose reps (investment adviser representatives) by law are fiduciaries, and financial planners who adopt the fiduciary code of ethics (planners are not regulated). Their role is to advise you on prudent investment strategy and other personal financial concerns. Fiduciary advisers are required to put your best interests ahead of their own, and to transparently disclose any conflicts of interest that may exist between you the client and their role as a fiduciary. Fiduciaries traditionally are fee-only and do not sell products or earn commissions from third parties. Historically, the SEC oversees the larger RIAs, while states oversee those with less than $25 million in assets under management.

Things have changed and are no longer so simple and clear-cut.

The poor results in the markets over the last decade, the growth of discount brokers, and the ease by which ordinary people can now trade securities online have not been kind to the big old-line brokerage houses that controlled the financial industry twenty years ago.

Many brokers with big account followings have pulled away and formed a new kind of hybrid RIA firm. These hybrid RIAs have been consolidating, and now there is a growing number that rival the national scale and size of the old brokerage houses, with hundreds or thousands of reps and in some cases, billions under management—just like the brokerage houses of old.

By law (The Investment Advisers Act of 1940), these hybrid RIAs must operate as fiduciaries, but they also sell product and receive commissions through their affiliated broker/dealer arm, which they disclose in some fashion during the course of their relationship with you, to comply with the law. They operate in varying degrees somewhere in the middle between commissioned financial advisors (brokers) and fee-only advisers and planners (BTW, the spelling of adviser with an ‘o’ or an ‘e’ is one of the issues, albeit trivial, that divide the industry).

Most everyone agrees the SEC has not been able to keep up RIA oversight along with the startling growth of the large RIAs. The Dodd-Frank reforms, which go into effect next month, move the asset level for SEC oversight up to $100 million, pushing those RIAs that managed $25 million to $100 million now under SEC oversight back to the individual states, who themselves vary considerably in their oversight abilities even with the current smaller universe they now oversee.

The Bachus bill would place oversight of the growing RIA industry under a self-regulatory organization. Some argue, why not buttress the SEC, do we really want another SRO?

FINRA is the most powerful existing SRO, well-funded from industry member dues and fees, with a well-funded lobby and highly paid executives. FINRA has argued there is no need for another SRO. They can take over the oversight of the RIA industry and save the taxpayers money while protecting investors from fraud and other irregularities.

The distinction between suitability and fiduciary standards seems lost on Congress and FINRA advocates. Many have pointed out the conflicts of interest inherent in the FINRA proposal.

If you watched the video, you should know the punchline: Your dietician is about to become regulated by the trade group that Lou the Butcher pays to look out for his interests.

And you thought the biggest problem on the regulatory agenda was whether you’ll be able to buy a Big Gulp in Manhattan.

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