The abuses that have come to light during the financial crisis are unacceptable, and reform on Wall Street is much needed. However, a bill recently introduced in the House has the serious potential to undermine investor safety rather than improve it.
The Investment Adviser Oversight Act of 2012 (H.R. 4624), also known as the Bachus Bill, proposes to remove the job of overseeing Registered Investment Advisors from the Securities and Exchange Commission and the states to a self-regulatory organization, likely FINRA (Financial Industry Regulatory Authority). This is akin to allowing the fox to guard the henhouse.
What is a Registered Investment Advisor (RIA)?
(Disclosure: My company is a Pennsylvania state registered RIA)
A Registered Investment Advisor is an investment company regulated under the Securities Act of 1940, and registered either with the SEC if assets managed are $100 million or more, or with the state securities commission if assets managed are under $100 million. Until recently firms with more than $25 million under management were SEC registered, but were switched to state regulation as part of the financial reforms of the Dodd-Frank Act.
RIA firms and their Investment Advisor Representatives are required to treat their clients with the highest standards of care. They have a fiduciary duty to their clients, or a fundamental obligation to act in the clients' best interest. Broker dealers and their representatives are registered with FINRA, and are held to a suitability standard, meaning the products they sell to clients must be suitable, but not necessarily the best. Now, most financial advisors are going to strive to do what is best for their clients regardless of a requirement to do so, but registered representatives, stock brokers, and others regulated under FINRA are not legally held to a fiduciary standard. Why the change?
An SEC study found that the agency doesn't have the resources to examine the country's 12,000 investment advisors frequently enough. The change from SEC to state registration for those RIA's between $25 and $100 million allows for improved oversight by state securities examiners. Based on the belief that the change will not go far enough, the Bachus Bill was introduced to create more oversight; but rather than simply increase the resources of the SEC and states to adequately do their jobs, the bill proposes the creation of a new self-regulatory organization. It is presumed that FINRA would take on the additional role, which I believe is not good for anyone but FINRA and its member companies, those financial giants that were at the heart of the financial crisis.
Let's be clear that the argument is not with increased oversight; to the contrary, the more consumer protections in place the better. Many of us in the RIA community take issue with being regulated by an organization that holds its members to a standard lower than the fiduciary standard, lacks accountability and transparency itself, and has advocated against a universal fiduciary standard. This bill will take the regulatory power over RIAs away from the SEC and state securities commissions, whose aim is the protection of the consumer, and give it to the behemoth FINRA, whose aim is taking care of Wall Street interests.
Both the North American Securities and Administrators Association (NASAA), an organization formed in 1919 devoted to investor protection, and the Project on Government Oversight (POGO), a nonpartisan watchdog that advocates government reform, are two groups on the side of investors that have publicly opposed the notion of FINRA taking on this role. According to POGO, "FINRA's regulatory effectiveness is undermined by its inherent conflicts of interest, its lack of transparency and accountability, its lobbying expenditures, and its executive compensation packages, among other issues."
FINRA is funded by its member firms, and has demonstrated its alliance to those member firms, not to the individual investor. POGO's letter by Reps. Bachus and Frank opposing the bill mentions FINRA's nearly $4 million in lobbying costs between 2008 and 2011, as well as its lack of transparency regarding compensation. In fact, POGO refers to the relationship between FINRA and the financial industry as "incestuous."
The cost to advisory firms under this plan will be too huge for firms to absorb. What that means ultimately are higher fees to consumers, and may in effect squeeze out those smaller players serving Middle America. The increase in independent advisors working on a fiduciary basis and their popularity with the public has not escaped the notice of the large financial services companies. According to Kathleen Dollard of Nashoba Financial Planning based in Boxborough, Mass., "I firmly believe this is a play by the "big guys" to put us out of business by increasing our compliance costs and to consolidate the industry into bigger and bigger firms. All we need is one more financial giant that is "too big to regulate We have the agencies we need with the SEC and the states — they just need the budget and the will to enforce the rules." Why should you care?
According to the National Association of Personal Financial Advisors, or NAPFA (of which I am a member), the Bachus Bill, if passed, will give us more of the same pro-Wall Street interests over the interests and protections of Main Street investors:
- FINRA's exorbitant operating expenses and bloated salaries make them more Wall Street than Main Street.
- FINRA's mandatory membership fees will put some advisors who offer advice to middle-class savers out of business.
- The burden of making small businesses pay mandatory fees to fund FINRA salaries is unconscionable.
- FINRA is not subject to Sunshine Laws and doesn't have to hold open meetings.
- FINRA is not subject to the Freedom of Information Act, and is notoriously secret about their books and records.
- FINRA is an organization of Wall Street executives who oversee Wall Street brokers.
- FINRA has no experience working with advisors held to the high fiduciary standard.
- FINRA can act like a government authority without government accountability.
Especially in the aftermath of the financial crisis, consumers have demanded a more transparent model in the financial planning profession, and want to be served by an advisor held to a fiduciary standard. The CFP Board, NAPFA, and the Financial Planning Association have been fighting for that same cause as well. Advisors themselves have responded, too, as more and more are leaving the broker dealer world to instead serve clients as a fiduciary.
At a time when we are making progress toward that vision, let's not let the Bachus Bill send us backward. Speak up for the protection of individuals and the evolution of a better, more consumer friendly financial services industry. Time is of the essence to voice your opposition, as the hearings on this bill start next week on Wednesday. Call your Congressman today. Don't know who or where to call? Visit http://whoismyrepresentative.com. Erin Baehr is a certified financial planner and owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.YourMoneyEveryday.com). Erin can be reached at Facebook.com/YourMoneyEveryday.