Friday, April 20, 2012

The Gravy Train Looks Like it Will Continue

It is beginning to look like Wall Street is going to win the battle over a fiduciary standard. Registered Investment Adviser firms like ours have always been subject to a fiduciary standard. It is the Banks, Wall Street firms and Insurance companies who have not been subject to the fiduciary standard.

For those of you who do not know, a fiduciary standard of care is one where the adviser must put the interests of the client ahead of their own. Banks, Wall St. firms and Insurance companies have been subject to a much more lax standard called suitability. This basically means if they think it suits you at the time of sale, then that is all that is required. It doesn't matter if it has a 10% commission and 10 years of surrender charges as long as it is suitable for you.

Banks, Wall Street firms and Insurance companies control most of the power and influence in Washington, primarily because they generate a tremendous amount of revenue from selling products to consumers. Registered Investment Advisers or RIA's as we are known, sell advice, not products. The problem with RIA's is that we are all independent people with independent ideas. There is no one association or group that represents us.

There is a consortium of organizations grouped under the name of the Financial Planning Coalition that would like me to believe that they represent me. However, this is simply not true. This group consists of the CFP Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors. The CFP Board regulates CFP's. The Financial Planning Association is an organization that includes CFP's, but also ChFC's and other professionals who hold themselves out as financial planners, but are not necessarily CFP's. The NAPFA is a very small organization of Fee Only advisers who have a requirement that their members are purely fee only and sell no commission based products. NAPFA is the best of the three by far.

Of these three groups, the CFP Board only has say over CFP's. There are a ton of individuals out there calling themselves financial planners, but who are under no supervision at all. I have seen numerous cases of insurance agents and bank employees who say they do financial planning, but are not registered to do so. Somebody needs to regulate ANYONE who claims to be a financial planner or who holds themselves out as a financial planner or claims to provide financial planning services. Sadly, the runaway train of bogus financial planners keeps right on rolling down the tracks.

The CFP Board is made up of CFP's who work at guess where? Banks, Wall Street firms and Insurance companies. A very small percentage are independent Registered Investment Advisers with absolutely no employment affiliation with any Bank, Wall Street firm or Insurance company. It does not take a smart person to figure out that if the primary revenue source comes from the financial advisors affiliated with these behemoth firms, then that in all likelihood is where their loyalty will lie. I have been a CFP for almost 20 years and they have yet to prove otherwise to me.

The Financial Planning Association is comprised of a similar makeup of professionals. Most all of them have employment affiliations with Banks, Wall Street firms or Insurance companies. Very few are independent Registered Investment Advisers. Again, it does not take a smart person to figure out where their loyalty lies, either.

The NAPFA is a very select and small group of professionals. The last time that I read about them, they had less than 3,000 members nationwide. I believe that the CFP Board and the FPA have close to 30,000 each. Although NAPFA is a good organization, their sheer lack of numbers probably minimizes their influence in Washington.

This Financial Planning Coalition is up against two major Wall Street organizations in SIFMA (Securities Industry and Financial Markets Association) and FINRA (Financial Industry Regulatory Authority). Both of these organizations want FINRA to oversee Registered Investment Advisers as the regulator of choice.

Somehow when most of the fraud and deceit in the financial services arena comes from Banks, Wall Street firms and Insurance companies, these powerful organizations have managed to turn the tide in their favor and portray RIA's as the enemy in Washington. When the reverse is actually true.

If you get nothing else in this article, understand this point. Registered Investment Advisers are subject to a fiduciary standard already and have been for a long time. Banks, Wall Street firms and Insurance companies have been subject to a suitability standard for also a long time. However, the Dodd-Frank legislation mandated that all financial advisers be subject to the fiduciary standard. The problem is that you cannot sell products and sell products from inventory and meet the legal definition of a fiduciary. As a result, Banks, Wall Street firms and Insurance companies are scrambling to re-write the definition of a fiduciary so it allows them to keep selling their products. In other words, they want the status quo. In addition, they want to gain control of Registered Investment Advisers. We are not the problem (RIA's.) The Banks, Wall Street firms and Insurance companies are the problem. They are the ones selling consumers all these high revenue, high commission, and no liquidity products. They do not want their gravy trains to end. Consequentially, they are lobbying hard to change the legal definition of a fiduciary and gain compliance supervision over Registered Investment Advisers.

It is all about money, power and more importantly control. They want control of the competition which are RIA's. Once they gain control, then they can exert burdensome compliance rules that make the cost of being a Registered Investment Adviser much more expensive. This is the end game in my opinion.

Unfortunately, as a group, Registered Investment Advisers are left to rely on the ethical morals of the people in Washington to protect us. Fat chance that will happen. Sadly, RIA's are the ones that are in the best position to protect consumers. If FINRA ends up in control of RIA's and succeeds in changing the definition of a fiduciary, then consumers will be the ones who lose.

As with everything else in life, we will adapt and move forward. However, it does not mean we will like it. As a consumer of financial services, you had better be very wary of anyone who is affiliated with a Bank, Wall Street firm or Insurance company. They are out to sell products and make as money as possible from consumers. Damn be the consequences.