After weeks of speculation, on May 20 the U.S. Senate finally approved some far-reaching new financial rules aimed at preventing the risky behavior and regulatory failures which brought the economy to the brink of collapse two years ago. It will be the most dramatic overhaul of financial regulations since the Great Depression. The bill must now be reconciled with the House-passed version -- H4173.
Provisions of the Senate’s bill include the requirement that certain-sized hedge funds register with the SEC; the creation of a Financial Stability Oversight Council; the establishment of a consumer financial protection agency within the Federal Reserve; and the requirement that the SEC conduct a study to determine whether advice-giving brokers should be held to the same fiduciary standards as registered investment advisors.
Congressional leaders say they hope deliver a final bill to the White House by July 4.
We wondered how branch managers and other industry insiders were feeling about all of this.
“The nature of any bureaucracy after a disaster like the recent financial crisis is to try and show the public that they’re doing something about it. And while they have the best of intentions -- wanting to protect us from people who are ill-informed or crooks—I don’t think new rules and regulations can really prevent this,” says Don Patrick, sole branch manager for Atlanta-based Integrated Financial Group, a nationwide consortium of 55 independent FAs which uses Securities America as its broker/dealer.
He sees no need for a new consumer agency. “We have plenty of existing agencies that can carry out any new regulations Congress deems appropriate.” Nevertheless, he’s not concerned this will create more red tape for managers. “This change will affect banks and loans more than our side of the business,” he says.
Patrick is in favor of new securities oversight rules, calling the current ones “antiquated. In fact, former Treasury Secretary (Henry) Paulson was trying to move this along before the financial crisis exploded, and he got distracted,” Patrick says. “But we definitely need new rules for a new world. We’ve had to worry about things like the font size we use on our correspondences, while Bernie Madoff was getting away with the greatest Ponzi scheme of all time. This has to change.”
He also feels the industry needs a way to systematically liquidate one troubled firm without shutting down the entire financial system.
And he’s a firm believer in the importance of fiduciary standards. “I know a lot of B/Ds are fighting this. But our advisors are RIAs and fiduciaries, and I feel that gives us a leg up on the competition. If nothing comes of the study, we have an advantage business-wise.”
Rich Franchella Sr., who oversees 50 advisors in four offices for RBC Wealth Management, including one in midtown Manhattan, agrees the industry could benefit from some well-thought-out financial reform.
He feels the hedge fund business is no exception. Since his advisors often recommend these and other approved alternative investments, Franchella feels it’s critical for advisors to not only conduct their own due diligence but to “feel confident that the funds and their managers are being held to an appropriate standard.”
He also supports the creation of a Financial Stability Council. “It would be incredibly irresponsible, given the events of the last two years, to move ahead with just the hope that we will never experience the Perfect Storm of 2008 and ’09 again,” he says. “It’s our duty to create a watchdog council to identify and evaluate potential risks in the industry.” And while he considers consumer protection a paramount concern, like Patrick he doesn’t feel a new agency is needed to achieve this.
On the issue of fiduciary standard, Franchella feels the industry is heading in the right direction, but believes the new proposed "Standard of Care" must be very specific and reflect the fact that investors now have many choices at full-service investment firms. “When FAs offer ‘personalized and customized advice,’ they will need very specific guidelines.”
And if a client chooses a full-service firm but wants to self-direct, “the provision must be adjusted to reflect that the FA is merely providing access to our platforms and resources with little or no advice component,” he says.
“There’s really only one aspect of this that’s going to affect us as branch managers,” says a wirehouse BOM on the West Coast who asked not to be identified. “And that’s the question of fiduciary interpretation, and how the firms are going to impute it. But the big firms have gotten away with not really dealing with this for a number of years already, so I don’t think anyone’s losing much sleep over it yet.”
Barbara Herman, senior consultant for Diamond Consultants, a Chester, NJ-based search and consulting firm, agrees. “The experts I speak with seem to think the outcome of this study will be years away. Congress has so many other issues to deal with right now that will take priority.”
The question of fiduciary standard is troublesome to managers from the standpoint that there are times advisors are on both sides of the fence, the wirehouse BOM says. “Just selling a bond from your firm’s inventory can be seen as a conflict of interest.” Managers may also worry that the cost of trying to supervise fiduciary standards would be so high that it would reduce company profitability, affecting their stock options, he adds.
Herman says some advisors are telling her they’re worried about how their companies would interpret and enforce any changes, and how that might change their workload and payout. “Some have expressed interest in the RIA world, where the fiduciary standard is not viewed as a threat. That’s where the industry is moving anyway. Still, I can’t say this is a widespread concern as yet.”
“I don’t see how can you realistically make people responsible as fiduciaries at retail or ticket firms,” the wirehouse BOM says. “There’s no way all 50 states are going to give up control of insurance products, just as one example.” Like Herman, he feels most people view decisions on the fiduciary standard as being “many years away. Even if they came about sooner, the retail firms will likely find ways to work around it. Our industry has been looking at this question since the late 1940s, and nothing’s really come of it yet.”
Chip Roame, chief principal of California-based industry research and consulting firm Tiburon Strategic Advisors, agrees the most potentially ‘game-changing’ regulation for the wirehouses is the question of fiduciary responsibility. He insists it’s a no-brainer: “Should advice-giving brokers be held to the expectation of doing what is right for consumers, many of whom have a retirement crisis, or should we continue letting them get by with lower expectations? This needs studying?” Like the others, however, he doesn’t expect to see imminent changes made.
As for the other regulatory provisions, Roame feels they have limited direct impact on branch managers. “At the firm level, I’d say the big issues are the potential spin-offs of proprietary trading businesses, the consumer protection agency rules, and the new power of the Fed. Since both Merrill and Wachovia Financial Advisors live under big retail banks, the consumer protection agency rules will tighten their profitability,” he says. “MSSB and UBS will be more impacted by proprietary trading business spin-off requirements, if they hold. But, even for them, I think the proposed rules are less extreme than some predicted.”
