Wednesday, June 16, 2010

Obama' Speech Contradicts Thinking on Financial Regulation

I watched President Obama's speech intently last night, as did a lot of Americans. We were all hoping for good news on the plugging of the oil leak five thousand feet down. Let's face the facts. As long as that leak continues, no one is going to be happy.

My take on the speech was a little different than most would imagine. It is not a political ideology that I write about here, but rather a correlation that I noticed in his speech. I found it rather ironic when he was talking about how the oil industry has been allowed to police themselves and this was a bad thing, it sounded just like the way the financial markets are regulated. Here are his Oval Office remarks from last night where he is talking about the Minerals Management Service:

"Over the last decade, this agency has become emblematic of a failed philosophy that views all regulation with hostility -- a philosophy that says corporations should be allowed to play by their own rules and police themselves. At this agency, industry insiders were put in charge of industry oversight. Oil companies showered regulators with gifts and favors, and were essentially allowed to conduct their own safety inspections and write their own regulations."

Did he just admit that an agency of the Federal Government was a complete and abject failure? Yet he wants bigger government. Sorry, I digressed.

While he was reading his speech, I was thinking to myself...this sounds a lot like FINRA, the Financial Industry Regulatory Authority. FINRA is a for profit company by the way. FINRA was in charge of regulating Bernie Madoff and countless other fraudsters. FINRA is a self regulatory organization which as the President says about the Mineral Management Service, "industry insiders were put in charge of industry oversight." This is exactly how our unscrupulous financial advisors are regulated. The people tied to the industry are involved in FINRA. They are without a doubt industry insiders. How is that working for us? Why isn't the President demanding change in the Financial Industry with regard to self regulation like he is in regard to "Big Oil"?

I am not one to normally look to other countries for answers, but I found it curious that the "Brits" have eliminated all forms of commissions from investment products. This causes all the financial firms to guess what, do what is in the best interests of the clients. What are we doing these days? Beating up on BP. Maybe we ought to step back a take a look at what they are saying not only with regard to BP, but also with the elimination of commissions for selling financial products.

These Wall Street guys are fighting this with every thing that they have, which is mostly money they obtained from their clients. For now, it appears that clients are going to end up on the losing end.

Today, as I write this, I received an email from Investment News. Here are some of the headlines:

Thirty-year scam financed adviser's 'sordid' secret life

Ex-Ameriprise adviser gets five years for fraud; ordered to repay B-D $2.7M

Falling Starr: A timeline of a celebrity financial adviser's alleged fraud

This is just in one day! Most of America has no idea how many of these scams are going on right now. These fraudsters are like cockroaches. They are everywhere!

Ponder this thought if you will. Does it really make sense for there to be a self regulatory (for profit company) in charge of regulation over the majority of "financial advisors"? (Series 6 or 7 registered representatives) Forgive me, but it does not appear to be working very well.

The for profit thing is kind of curious too. Whenever FINRA needs to make money, all they have to do is find one of their members to slap with a big fine. This seems kind of goofy to me that they would be a for profit company as a self regulatory organization.

Congress is hammering out the details of Financial Reform legislation over the next couple of weeks. If FINRA really wanted to, they could influence the legislators with their demand for the Fiduciary Standard. Executives at FINRA have publicly stated that they are in favor of a fiduciary duty to clients. Back door, cigar filled rooms tell a different story. It is no surprise to me that the Fiduciary Standard is absent from the upcoming legislation.

FINRA regulated Brokerage Firms do not want this Fiduciary Standard at all. The sad truth is that Wall Street will be able to continue business as usual using a Suitability Standard instead of a Fiduciary Standard. In a nutshell, this means that they can continue to do what is best for their firm first, before doing what is best for their clients. The end result will be the continued sale of high commission, high revenue generating products with poor liquidity features that are absolutely awful for everyday investors. Until we eliminate the scourge of commissions from our landscape, then investors will be taken to the cleaners over and over again.

Investors can do something about it however. Only do business with Independent Registered Investment Advisers. This means only do business with people who do not have a Series 6 or Series 7 license.