Have you heard the news that RIAs are facing a grave threat to their businesses? I suspect you have. At industry conferences, presenters tell us how to cope with the increasing regulatory burden without diminishing your client service. Software companies are programming ways for you to protect yourself against an audit rather than offering better solutions to clients' financial challenges. At the Technology Tools for Today Conference in February, a paperless office presentation focused on better retrieval of the paperwork demands you will face when the auditors come knocking.
Compliance obligations have become the dark cloud over the profession's future, to the point where, in hallway conversations, we routinely hear veteran advisors say they plan to retire when the burden becomes too great. Younger advisors say they're looking for ways to get the scale to afford the increased demands we all see coming.
All this might be tolerable if we could see how consumers were being better protected. But every conversation about SEC audits concludes that the auditor was unfamiliar with advisor business models and/or more focused on paperwork than on safeguarding investors.
The SEC and FINRA have responded to criticism over missing some famous, large-scale frauds by jumping ever harder on advisors who played no role at all in that ugly sequence of mistakes. Small fiduciary RIAs are suffering most from the consequences of the scandals. And we all know it's going to get much, much worse if FINRA takes over RIA regulation.
21ST CENTURY REGULATION
Is there a better way? Of course there is! The profession needs to take the initiative and create a blueprint for better 21st century regulation. The fiduciary planning/RIA profession has an obligation to give regulatory organizations a workable path to better, more effective, more efficient consumer protection. The industry needs to collect every good idea from advisors, put them all together, consult with compliance professionals and former regulatory officials on their feasibility, and then show the world a comprehensive regulatory structure that is light years better than what we have now.
As you read this, I'm in the process of collecting these ideas from my Inside Information readers. Even if you're not a subscriber, I would be grateful if you would offer your thoughts so we can get the broadest possible participation in this discussion. What would you do differently to protect consumers?
As we go through this process, we need to stipulate that there are bad apples in the RIA world and probably always will be. Unfortunately, there is a legitimate need for RIA firms to be watched.
We also need to focus exclusively on ideas that would benefit and protect the consumer. This should not be too difficult for professionals who routinely live by a fiduciary standard, but it's important to remember that the ultimate goal is not the convenience of the RIA firm.
The best ideas will achieve three goals at once: They will let the regulators better protect the public, they will be less costly to administer, and they will be more efficient and less intrusive at RIA offices. Ideally, we'd save taxpayer dollars, give advisors more time with clients, and do a better job of catching the crooks - all at the same time.
I also think we need to assume the SEC examiners and staff want to do a better job, and that they are sincere in following their regulatory/consumer protection mission.
I suspect one reason morale has been so low at the SEC is because everybody there can see that the process is broken, and there is little confidence it will be fixed. We need to start this brainstorming initiative by believing that, if we come up with some great suggestions, they will someday define our next regulatory process.
I'd like to say the same about FINRA, but I don't think the evidence bears it out. I believe FINRA's board and senior executives are lobbying for authority to regulate RIAs for two reasons. It would mean more money in their coffers, which would justify raising FINRA's already-bloated salaries. Also, I believe FINRA officials would like to put independent RIAs at a disadvantage to the brokerage firms they primarily work for or put independent RIA competitors out of business. If we create a better, more plausible, more consumer-friendly regulatory process, we could pressure FINRA to make its own competing proposal for how it plans to regulate advisors.
So consider this: If we could start over, what would be the best way to regulate advisors in light of 21st century technology, and also in light of the new dangers and realities and business structures that have emerged in the past 50 years?
What is the best way to regulate fiduciary RIAs? How best can we identify and weed out bad apples and better protect consumers in the process?
WHERE TO START?
To get you started, here are some of the more interesting answers I've received. Securities attorney Tom Giachetti of Stark & Stark in Lawrenceville, N.J., pointed out that the first and most important goal is to identify quickly those advisory firms that are stealing money from clients.
This, the biggest cause of consumer harm, should be the top priority. Instead of spending weeks in an advisory office once every 10 years, and spending most of that time looking for fussy little foot-faults, the regulatory organization of the 21st century would visit each RIA firm more often - say, once a year - and focus that short visit on determining whether the client money is where the advisor's statements say it is.
This could even be done electronically. Suppose Junxure or Redtail were to include a special regulatory module which would, at the request of the advisor or a regulator, spit out client portfolio data with the names automatically redacted for privacy purposes?
The custodians would have a similar module, so the regulator could synchronize account numbers automatically and compare the account values with the statements. If this were done every quarter, any budding Madoff could be identified before he had a chance to make off with more than a small sum.
Less often, the 21st Century Regulator would inspect for all other issues - and here again my readers see room for improvement. Start by hiring forensic accountants or retired planners to do the audits - people who would know immediately where to look for problems. Instead of fretting over whether you signed a certain document within 30 days or traded 401(k) assets before or after client portfolios were updated, they would look at your recommendations, your marketing activities and would ask about any strange investments.
They would prioritize. If your client portfolios are made up of mutual funds, ETFs and legacy stock positions, and you trade through a known outside custodian, the examination would be relatively brief.
If you've pooled your client assets into LLCs invested in hedge funds, the visit would take longer, and longer still if you're managing your own hedge fund, investing in hard-to-value assets, paying for referrals or taking soft-dollar payments. Visits would be longest for advisors who have custody of client assets, or whose offices pay bills out of client accounts.
If advisors far and wide get behind this effort to create a regulatory framework, we have a chance to make a real difference. Whatever suggestions you make will be read and considered with interest, and I'll let you know what we all come up with.
Bob Veres, a Financial Planning columnist, edits and publishes the Inside Information service for advisors at bobveres.com. Send your regulatory ideas to bob@bobveres.com and post them on Financial Planning's discussion boards at
