On Wednesday, June 6th, the House Financial Services Committee will conduct hearings on a bill called “H.R. 4624, the Investment Adviser Oversight Act of 2012”. This legislation was proposed by both Representatives Spencer Bachus (of “the government should serve the banks” fame) and Carolyn McCarthy (a Democrat from NY’s 4th Congressional District). Now that I’ve gotten the dry stuff out of the way – this is what is really happening…….
I am an independent financial planner. I try to help “regular people” make informed decisions about their finances. I am different from the financial advisor at your local bank or brokerage firm in a few ways:
* I can help you with topics other than investments and insurance.
* I make money when you hire me to provide advice. You write me a check for my services. A banker or broker makes money when they sell you a product such as a mutual fund or annuity.
* I am regulated/supervised by 2 bodies. As a very small Registered Investment Adviser, the securities division of my state is responsible for keeping an eye on me. (If I dealt with a LOT of money, the SEC would be my regulator.) I am also a CFP®. If I screw up, you could report me to the Certified Financial Planner Board of Standards.
Why in the world does any of this matter to you? Follow me below the fold ......
For many years, Registered Investment Advisers (like me) have been trying to differentiate ourselves from the bankers and brokers who sell products. We have tried the following:
Fiduciary vs. Suitability - I must always put my clients’ interests ahead of my own and disclose any potential conflicts of interest. This is called a “fiduciary standard”. Advisers overseen by FINRA are governed by a “suitability standard” – her or she must have a reasonable basis for believing that their recommendations are suitable for you.
Fee Only versus Fee Based (Commissions) – As a fee only advisor, I only make money when you are willing to pay me out of your own pocket. Fee based advisors can also charge you directly, or earn a commission based on the product that you buy. Most times, you – the client – don’t know the amount of that commission. Some people think the advice they receive is “free”. They don’t know that the cost of their financial advisor is likely reducing their investment returns.
When you combine the “suitability” standard with advisors who earn their money based on the products they sell, the banker/broker might suggest investments that give him or her the highest paycheck.
Many of my “fiduciary, fee only Registered Investment Adviser” colleagues have adopted a holier than thou attitude toward the fee based and commissioned financial advisors. I felt that way for many years. I’ve mellowed a bit – I believe that there are many ethical financial advisors who work by earning commissions. It’s really up to you, the consumer, to decide how you want to work with a financial advisor.
Have your eyes glazed over yet? Are you still awake? What does this have to do with the Bachus/McCarthy legislation?
Consumers are (understandably) confused about the differences between the different types of financial advisors. The “fee only” guys and gals tend to be small business people. We don’t have the time, money or unity to create a message that resonates with consumers, or elected representatives. The FINRA guys and gals (for example Merrill Lynch, Edward Jones, LPL and the advisors at your local bank) have the money and unity to sow these seeds of confusion AND lobby Congress to get what they want.
The Bachus/McCarthy bill gives them what they want. Financial advisors who work with consumers will be supervised by one Self Regulatory Organization (SRO) and that SRO will be FINRA. The stated intent is to eliminate confusion and offer greater consumer protection. One of their arguments is that FINRA registered financial advisors are audited on a regular basis, whereas small state registered advisors may never be audited. (This is true.) However, quantity of regulation does not equal quality of regulation. (The stories I could tell!) They want to water down the fiduciary standard to align more closely with the suitability standard. Rumor has it that the cost to join this SRO will be in the $50,000 range. At the risk of sounding like a Republican – “This regulatory burden creates uncertainty and would put me out of business!”
The financial professionals on “my side” fully recognize the importance of effective regulation. Crooks like Bernie Madoff make us all look bad (he was regulated by both the SEC and FINRA). We want something meaningful that will root out the next Bernie Madoff without inundating ethical advisors with costs and paperwork that enforce meaningless regulations.
Until now, I have watched the debate regarding the regulation of my profession from the sidelines. I like working independently and don't have the patience for working within committees to advance an agenda. I wrote this diary as attempt to do my part towards educating a group of smart and involved citizens about one more attempt by big money to take over another aspect of our lives.
If you would like to contact your congressional representative, one of those sample letter thingies is available here: Contact your representative
Thanks for reading!