The strain on the financial advisory business is starting to show.
As more regulations pile up, advisors and their broker/dealers talk as much about which form to fill out as they used to confer over asset allocation strategies.
Moreover, thousands of reps have opened the morning paper to find the names of their broker/dealers included in headlines sprinkled with words and phrases like "criminal" and "SEC charges." Most hope that the storm will abate over time, but for reps, their primary struggle is to balance compliance and client demands.
The process starts behind the scenes at the broker/dealers. The costs of compliance creep up as the need for legal advice and additional compliance personnel grows.
At Oak Brook, Ill.-based Oakbrook Financial Group, the compliance job that was planned as one full-time person has expanded to a person-and-a-half. Legal fees mount as the firm seeks reviews of even purely routine client documents. "Our NASD fees will probably go up as well, as the regulators put more effort into making sure everyone is complying," said Oakbrook president Peter F. Bauer.
The compliance director spends a growing amount of his day conferring with the 35 financial advisors registered with OFG. "In addition to more formal training, there are more phone calls," he said. "They're looking for us to help interpret the rules and clear up confusion about which form to use in which circumstance."
Oakbrook's reps don't read about problems at their broker/dealers, as many others have. Institutions such as American Express, Raymond James, AIG, Alex. Brown and Merrill Lynch are just a few of the names on an expanding list of broker/dealers slammed with infractions.
In fact, the newly formed Web site www.fundpolice.com cited 509 unique infractions at broker/dealers and mutual fund families. "For an independent rep, the reputation of the broker/dealer is very important," said Jeffrey Alan Adelstone, EA, CFP, of AFS Tax and Planning Group, in Tucson, Ariz. "If the character and integrity of an independent's associations are tarnished, the rep has to be thinking about moving firms."
Mark Balasa's fee-only Balasa Dinverno & Foltz LLC targets the high-net-worth investor end of the Chicago-area marketplace, where he observed the affects of the bad news. "When dealers get tagged, brokers can just go across the street and pick up with someone else," said Balasa, a CPA and CFP. "Reps know they work with their clients. They go where they need to and probably get a signing bonus to move. Life goes on."
Adelstone, however, is not ready to move.
His firm has offered securities through HD Vest Investment Securities since 1983. But he's clear about Vest's response to the regulatory storm. "I'm screaming bloody murder at our broker/dealer," says Adelstone. "They've gone 180 degrees beyond the minimum standards to the point where we're spending an hour a day filling out forms."
According to Adelstone, Vest requires disclosure forms on even the most automatic of client actions, periodic payments into existing accounts. "Even though the client has already authorized the withdrawal right out of their checking account, we have to get yet another form signed," he said.
While CPA advisors led the way in disclosing facts to clients, today's account-opening process makes real estate closings seem uninvolved. The process is just as involved before the client faces the pile of papers needing signatures. Both the dealer and the rep face a series of choices and, in many cases, overlapping sets of regulations. If a rep wants to employ an outside asset manager for a client at Oakbrook Financial, the rep can choose to get paid a commission or a fee.
"The commission paid is defined by a percent of assets and the fee that would be paid through the registered investment advisor side is defined as a percent of assets," said Bauer. "The check paid usually turns out to be exactly the same under each choice, but from a regulatory perspective these are two different worlds."
Before the client sees the papers, the dealer sifted through compliance with NASD rules or the RIA assured compliance with regulations primarily handed down by the Securities and Exchange Commission. Proper forms get generated. The dealer confirms the rep has proper licensing: Series 7, 63 and 65 for commission payments, or Series 66 if the advisor chooses payment in fees.
Navigating between the regulatory standards is complex now, and getting worse. While the brokerage side labored under a large body of rules designed to protect smaller investors, regulators felt that the larger investors were served by registered investment advisors and needed less looking after. "Up until recently, the RIA side enjoyed streamlined rules," said Bauer. "Indications are that in the next three years there will be as much paperwork as the broker/dealer side."
Despite this flurry of activity and attention to detail, investors seem unaffected. "Clients just shrug their shoulders when we ask them to sign yet another form," said Adelstone.
Nor do investors seem to show concern at announcements of their broker/dealer's misdeeds. "Clients see names in the paper like Merrill Lynch and Morgan Stanley being nicked for fines, but it doesn't make one bit of difference," said Balasa. "They say it's not my guy at that firm so they don't care."
Industry watchers see signs that the burden on advisors will ease. "About every generation-and-a-half, we go through this cycle of scandal and then restricting regulations," said Balasa. "After two years this cycle has probably peaked."
Adelstone expected his broker/dealer to respond to reps' complaints and find ways to streamline the paperwork. The Financial Services Institute, an industry advocate, is finding success in persuading regulators to consider simplifying some rules, including breakpoint disclosures and broker/dealer exemption from the SEC investment advisors act. And reps are getting used to handing piles of documents to clients for signatures.
"I don't expect immediate relief," said Adelstone. "But if the SEC doesn't back off this path, they'll have us spending six hours a day on paperwork."
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