War Breaks Out on Wall Street

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An irreverent Wall Street Blogby Bill Singer
http://www.brokeandbroker.com/index.php?a=blog&id=292


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Coalition Accuses Brokers and Insurance Agents of Spreading Misinformation
Written: January 13, 2010
The other day I read a sharp-edged and tartly worded document from, of all places, an apparent coalition of


  • the North American Securities Administrators Association (NASAA),

  • the Consumer Federation of America,

  • the Certified Financial Planner Board of Standards, Inc.,

  • the Financial Planning Association, 

  • Fund Democracy,

  • the Investment Adviser Association, and

  • the National Association of Financial Planners Association. 

Not exactly the rabble of Wall Street.  The title of their position paper says it all: 
There They Go Again: Brokers and Insurance Agents Are Spreading Misinformation About the Senate Regulatory Reform  Bill's Fiduciary Requirement for Investment Advice.
Wow --- and they say that I don't pull my punches? 
In case you haven't heard, there is a nasty fight brewing between

  • the broker-dealer community and the financial planning/investment advisers community; 

  • those espousing the historic Fiduciary Standard and those clinging to the Suitability Standard; and

  • FINRA (and its allies, most notably SIFMA) and the Financial Planning Coalition (the CFP Board, FPA, and NAPFA). 

This is not just a minor tiff between competing industry interests but a fight for the future of Wall Street.  Much is at stake. It may well be a fight to the death.
While a number of salvos have already been lobbed back and forth in this war, the signatories to the There They Go Again memorandum have raised the pyrotechnics up a notch. Consider this excerpt, an in-your-face haymaker at FINRA:
Myth: FINRA should be recognized as the SRO for investment advisers in order to eliminate the regulatory gap that led to its failure to detect the Madoff Ponzi scheme.
Fact: FINRA cannot credibly claim to have missed the Madoff Ponzi scheme because it lacked jurisdiction over Madoff’s investment adviser operations. On the contrary, there was no Madoff investment adviser operation until 2006. . .
TO READ MORE, VISIT:
http://www.brokeandbroker.com/index.php?a=blog&id=292

Milyunair's picture
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Bill, how about breaking the implications down a little here.
What are the implications for RRs and what are the implications for RIAs?
 
Personally, I'm an RR who has considered going RIA but feels the impending "battle", considering the size of my book, would leave me more vulnerable (but richer) as an RIA.
 
I get the feeling you are advocating separation of oversight of b/d vs. RIA, for whatever reasons, which I confess I have not been following carefully.
 
Everyone is always trying to hose financial advisors. RRs can make money for folks in the b/d change industry, and fees can be scooped off 12b1s and wrap admin fees, and such.
 
RIAs might be a great untapped gold mine from the regulatory standpoint (fees, capitulation and aggregation of firms too smale of scale if the regulatory environment changes).
 
I'm just an ignorant weaner (traditional definition). Life is short. If you are inclined, how about some analysis and synthesis of the data for the masses? There may be other weaners here who might one day retain your services or enhance your journalistic perspective or otherwise reciprocate the favor.

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Bill, how about breaking the implications down a little here.What are the implications for RRs and what are the implications for RIAs?
REPLY: Wall Street is under attack from within and without.  From without, all you need to do is listen to today's Congressional hearing (as I've been doing all day) and you can clearly understand the depth of the public's disgust with our industry and the pressure likely to come down upon the industry from Capitol Hill.  From within, it's a growing divide between the broker-dealer model that is largely dependent upon captive RRs paid on a transaction basis and Financial Planners/RIAs who are largely dependent upon more independent CFPs/IARs who largely paid on a fee basis.  I have long complained about the harmful impact of the BD system that holds RRs hostage to house product and the Grid.  Moreover, I believe that RRs should be far more independent of the BD with which they are registered and I dislike the self-regulatory scheme that will not grant a vote on regulatory matters to RRs but gives it to their employer firms and imposes mandatory arbitration.  Notwithstanding, the RIA model has many flaws and CFPs and IAR are just as apt to be corrupt and to engage in fraud as their RR counterparts.  Ultimately, the implications are in the air -- it simply remains to be seen whether any side wins the tug of war or whether we move forward with a hybrid model.
 
Personally, I'm an RR who has considered going RIA but feels the impending "battle", considering the size of my book, would leave me more vulnerable (but richer) as an RIA.
 
REPLY: Welcome to the club.  Among the more common calls I get these days are from many of my RR clients who are wrestling with the same issue, and from many of my BD clients who are fed up with FINRA and the multi-layers of regulation and are opting for RIA status.
 
I get the feeling you are advocating separation of oversight of b/d vs. RIA, for whatever reasons, which I confess I have not been following carefully.
 
REPLY: I'm not advocating that -- fact is, it already exists.  FINRA does not presently have oversight of RIAs and the state/federal scheme depends upon AUM.  In addition to oversight is the thorny issue of whether the "Suitability" or "Fiduciary" Standard will apply.
 
Everyone is always trying to hose financial advisors. RRs can make money for folks in the b/d change industry, and fees can be scooped off 12b1s and wrap admin fees, and such. 
RIAs might be a great untapped gold mine from the regulatory standpoint (fees, capitulation and aggregation of firms too smale of scale if the regulatory environment changes). I'm just an ignorant weaner. Life is short. If you are inclined, how about some analysis and synthesis of the data for the masses?
 
REPLY: You raise many valid points and I confess that I am unable to address and resolve all the issues.  My personal/professional observation after some three decades on the Street (and that includes a number of years as a Series 7/63), is that the broker-dealer/RR model is broken and somewhat disreputable.  Moreover, for many RRs there is a constant sense that their employer is their BD, and that their employer wants them to drink the Kool-Aid.  In reality, the employer should be the client and the RR should merely be working "at" the BD and always "for" the client.  I think that if you talk to most IARs that they will generally express a greater sense of professional independence when measured against their RR counterparts.  However, NONE of that is meant to imply that IARs are holier or more ethical than RRs.  It is meant to imply that the compensation system (which is typically based upon AUM) seems to avoid many of the inherent conflicts that arise when you're pay depends upon pushing a buy or a sell.
 
For me, the larger issue is FINRA and its future role.  I am no fan of that self-regulator and view it with suspicion.  I see FINRA as a tool of management because only member firms get to vote.  Further, I see FINRA as biased against smaller member firms and individual associated persons and impervious to substantive reform.  Now that FINRA has designs on becoming the SRO to the financial planning/RIA sector (a move that is strongly opposed by that industry), it is poised to suck the air out of self/private regulation.  Additionally, if FINRA has its way, I fear that it will always further the desires of its larger BD members to the detriment of the financial planning/RIA community and to the detriment of all individual registered person. 
 
Absent from the debate -- and pathetically so -- is any credible trade group advocating the best interests of RRs and IARs.  While SIFMA, NAIBD, and FSI throw their weight around on behalf of their member FIRMS, no one speaks with authority for the hundreds of thousands of individuals who toil in the fields.  That's just absurd!

Milyunair's picture
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Joined: 2009-09-25

Thanks, Bill, for providing a most articulate articulate discussion.
When you do the numbers, it would be in the best interest for the "hundreds of thousands of individuals who toil in the fields" to have an advocate.
 
We need a trustworthy platform on which to do our business. I guess that looks like RIA.
 
It would look like "wrap", with a higher payout for the average advisor (realized by cutting out b/d overhead). Consumers would not have to rely on the branding of b/ds for "security". Costs would be reduced, advisors would be better paid to spend more time with their clients.
 
The small investor - maybe as low as twenty five or fifty thousand assets under management at 1.5% fee, would be better served by more advisors.
 
It would be easier to start the next generation of financial advisors. There would be more meaningful competition to serve clients.
 
If enough advisors could see the light, they would hire their own advocate. To pay for that, RIAs are already getting a good payout but b/d advisors are rather constrained  by existing costs.

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