RIA state of the union

RIA state of the union

Skip Schweiss | May 5, 2015

With such little movement on the regulatory front, maybe it’s time to forge a new path of conversation around regulations and standards in the financial advice space.

When it comes to regulatory issues that impact your business and the financial advice industry as a whole, there’s not a lot of new developments to report. While the Department of Labor is marching forward with raising the standards for advice to retirement investors, the same issues that were being debated yesterday, particularly the uniform fiduciary standard and advisor oversight, are trapped in a maze of bureaucracy and still being debated today among competing circles in Washington. One SEC Commissioner recently expressed, “I have been frustrated that seven years into my tenure we remain where we are, at square one.”

With such little movement on the regulatory front, maybe it’s time to forge a new path of conversation around regulations and standards in the financial advice space. This new path was explored during a town-hall style session at the 2015 National LINC conference.

The conversation centered around three topics—financial planning as a profession, fiduciary best practices and self-regulatory organization for RIAs. Let’s take a look at each one as food for thought.

Financial planning as a profession

Advising people on investment decisions is a practice that has long-term life implications. At the core of this practice is the trust and confidence an investor has in their financial advisor and the financial planning community as a whole. How can we ensure that this trust remains and grows stronger? One solution is to gain recognition of the practice of personal financial planning as a profession.

In discussing this topic at the conference, Jeffrey W. McClure MS, CFP® points out that financial planning is a trade. Unlike a profession, it has no federal or state-regulated fiduciary standard, advisors are not held legally liable for the work they perform and it has no minimum requirements for entry.

If the financial planning community is to increase its credibility and acceptance among investors, it may want to consider becoming a profession and being regulated like other professions, such as doctors, lawyers and accountants. This would mean minimum academic requirements, a self-governing and self-policing institutional organization and a state board composed, in part, of established members of the profession, as well as adherence to a fiduciary code of ethics.

Fiduciary best practices led by fiduciary advisers

There are many differing voices around the subject of fiduciary responsibility and regulation. During a speech to the Consumer Federation of America on March 27, 2014, SEC Chair Mary Jo White said, “Investment advisers are fiduciaries to their clients, and, as such, generally must put their clients’ interests above their own and avoid, or disclose, any conflicts of interest when providing investment advice.”

But when it comes to establishing a federally-regulated fiduciary standard, SEC Commissioner Daniel Gallagher said in an interview, “This is not important. Fiduciary duty is neither [financial]-crisis related nor urgent in that we’ve identified a market problem.” 1

In an advisement landscape filled with distrust among investors and fiduciary opposition on both sides of the political party aisle, it’s more important now than ever for investment advisors to lead the charge when it comes to their fiduciary responsibility to their clients and speaking out on what differentiates fiduciaries from sales brokers.

Self-regulatory organization

The need for transparency and fiduciary responsibility among RIAs is vital. They are the key elements that cultivate trust among investors, yet without proper and consistent regulation, it is impossible to ensure.

In the Dodd–Frank Wall Street Reform and Consumer Protection Act, Congress signaled its intent to improve regulation. However, little activity has been seen, with only 10% of RIAs being examined by the SEC for fiscal year 2014, corresponding to an exam cycle of once every ten years, and the average examiner capable of conducting fewer than three examinations per year.

Is it time for a Self-Regulatory Organization (SRO) for RIAs? The inefficiencies of government examination and the unique business needs of RIAs may seem to indicate that the time has arrived to at least discuss this as an option. Investor protections, and the reputation of the RIA industry, demand better than what we have today.

There’s much to consider when it comes to regulatory issues in the investment advice industry. Whether it’s moving from being a trade to a profession, a uniform fiduciary standard, or self-regulation, it will take forward, creative, progressive thinking to keep our industry at the forefront of credibility and trust among investors.

To help keep you in the know on important topics, later this spring we’ll be introducing a new eAdvocacy tool to help unite the RIA industry as one voice and carry it to Washington. With it, RIAs will have access to a directory of lawmakers and their staff members allowing them to become part of the grassroots campaigns and connect to Capitol Hill. Look for more information in the coming months.

1. Investment News, Fiduciary duty rule: No way out. July 13, 2014