On Wednesday, June 6, 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 and Carolyn McCarthy. The plan is to have all small firms like me regulated by one agency called FINRA. These are the folks who currently regulate Wall Street--get the picture!
This is not a good bill!
As an independent financial planner, I work with all kinds of "regular folks" helping them with all aspects of their financial life. I sell "peace of mind." I am compensated by a fixed retainer or fee. I sell no products, receive no commissions, finders fees, kickbacks etc... I am regulated by the State of California.
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.
The Bachus/McCarthy bill will require that 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.) 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. This fee would literally put many of us out of business!
While I am totally in favor of increased regulation for all financial firms, we need to find a better way.