I love the CFP Board, but for solo-entreprenuers, trying to come up with a disclosure form that meets the SEC's Regulation Best Interest and the CFP Board's new Code of Ethics and Standards of Conduct means that I will have to develop two disclosure forms. There is no way on God's green earth that the Regulation Best Interest disclosure that I painstakingly came up with is going to qualify as a disclosure that meets the CFP Board's new Code of Ethics and Standards of Conduct.
Lucky for me, I have been doing this since December 1, 1992 and I have a lot of experience. I feel sorry for those CFP's who do not have my level of expertise. There was a chart that I saw recently on Twitter that used the Securities and Exchange Commission's estimate of costs to prepare the Regulation Best Interest Disclosure and it was staggering. The cost was between $4,000 to $8,000 per year, if I recall correctly. Don't forget to add on top of that, the cost to design a CFP disclosure that meets the new Code of Ethics and Standards of Conduct. That's probably easily another $5,000 per year. Of course, there is already the cost of Form ADV 2A and 2B disclosures that already cost in the $5,000 per year range. So, if we tally all this up, if you are a CFP and a Registered Investment Adviser, then you are probably looking at spending $15,000 per year just on disclosure forms.
If you are a client of a CFP, let me ask you, did you read from cover to cover and ask pertinent questions of your CFP and their business model as a result of their Form ADV 2A and 2B disclosures? Or, did you just trust them? What happens if now, in addition to the Form ADV 2A and 2B disclosures, your CFP now piles on top of that this new disclosure related to the Code of Ethics and Standards of Conduct and also, the SEC's Regulation Best Interest disclosure? If you did not read the Form ADV 2A and 2B before, are you really going to read these additional pages of disclosures?
This is what drives me batty about regulations in the financial services industry. The powers that be always believe that more disclosure is better than less disclosure. In my opinion, more disclosure increases the likelihood of someone not reading your disclosures. Let's face the truth, who wants to read 50 pages of stuff and sign over and over again in multiple locations that you are aware of this and agree with that? It is just going to be more confusing and harder to get new clients!!! People will freeze up and not do anything. More regulation, in my opinion does not protect clients from unscrupulous financial advisors. If you do not believe me, read my prior post about California Alcohol Licensee "Investments." Those "advisors" did not disclose doodle squat. They just stole people's money.
It is the same thing with gun control and these crooked advisors. One crooked advisor rips people off, then ALL advisors have to have more regulation as a result. It is not going to stop crooked advisors from stealing people's money. They will continue to steal people's money no matter what the regulations, because like criminals who manage to obtain guns illegally despite laws against it, these kind of "advisors" do not care about laws and regulations. Why? Because they are criminals, too. It is the same line of thinking that making law abiding gun owners subject to more gun laws will do absolutely nothing to stop guns from getting into the hands of criminals. The criminals will just break into more houses and more cars to get the guns they need to commit their crimes. A new gun law is not going to stop them, just like more regulations for financial advisors is not going to stop crooked advisors from stealing people's money.
Again, I will do the grunt work and come up with the proper forms and disclosures, but brother do I feel sorry for people without my level of expertise.
Maybe, just maybe, if you are a client of a financial advisor, then you might be a little forgiving about the things we have to go through just for the privilege of giving you advice. Further, have a little compassion when your financial advisor asks you to sign their CFP disclosure and their other forms, now that you know what goes into it.
Showing posts with label Form ADV 2A. Show all posts
Showing posts with label Form ADV 2A. Show all posts
Tuesday, September 10, 2019
Thursday, August 22, 2019
Reg BI - Advisors Will Write Big Checks For This Rule
One of the things that I do as a Financial Planner and Professional Money Manager is stay abreast of what's going on in my industry. Sometimes, because of new regulations, I have no choice in the matter. This is one of those times.
The SEC has passed a new Final Rule called Regulation Best Interest, or Reg BI. This rule requires different things to happen as far as disclosure is concerned. It depends on how the financial advisor is licensed. If they work for only a brokerage firm and not a registered investment adviser, then they have to have a two (2) page disclosure. Insurance agents come to mind for this category.
If they are dual registered, meaning if they are licensed with a brokerage firm and a registered investment adviser, then they have to have a four (4) page disclosure, or they can give 2 two-page disclosures for a total of four pages. One two page disclosure for their brokerage firm and then another two page disclosure for their registered investment adviser firm for a total of four (4) pages. (I hope they do not forget to give prospective clients both two page disclosures, or all four pages!) Big brokerage firms come to mind for this category.
If the adviser is licensed only as a registered investment adviser, then there is a two (2) page disclosure. Both of these required disclosures essentially repeat items currently disclosed in Form ADV 2A documents already required to be disclosed to clients. The new items are called Conversation Starters. The SEC thinks we need to have a conversation with our clients and prospective clients which is a good thing I suppose, but seems a little artificial to me. These RIA's are generally advisers who charge a fee of some type, but as a caveat may also be able to sell commission products.
Now, as a result of this SEC Reg BI Final Rule, we will be adding two pages to our disclosures.
Why is more complexity in the way of disclosures always the answer when it comes to the government, specifically the SEC?
I believe the SEC adds complexity, because it is a way to keep a thriving legal and compliance community in business.
The costs of compliance for brokerage firms is not an issue. They have plenty of money to pay people, or hire outside compliance experts to draft a two or four page Reg BI disclosure for them. In the same vein, large registered investment adviser firms also can hire outside compliance experts to draft the Reg BI disclosure for them.
Where the pain of the Reg BI falls is on smaller firms. Luckily for me, I have thirty-one (31) years of adapting to changing rules and have garnered compliance experience from small brokerage firms, large brokerage firms and several registered investment adviser firms. This is not to say that I am the most expert person on compliance that ever existed, but I have a secret. I can read. When these Final Rules come out, I simply take a very deliberate approach and read these Final Rules over and over again, until I am comfortable with what the disclosure should say. Even then, sometimes when I go through state securities examinations, there are some things that I may have missed. Most of these misses are generally minor in nature, like forgetting to check a box or something, but nevertheless, it shows that even someone with years, even decades of experience does not always get it 100% right.
Now, imagine if you do not have my experience, nor my compliance skills. Reg BI creates a problem for you. The experience and understanding to draft this Reg BI disclosure on your own is either simply not there, or you have more important things to do, like running your business. What is your choice? You have to hire or have on staff a compliance expert to tackle this Reg BI disclosure. If you have to hire an outside compliance expert, then what is that going to cost? If you hire a lawyer, then odds are it will cost more than hiring a compliance firm. Think about this fact. You have a registered investment adviser firm and you have to have this Reg BI disclosure document. The window opens on October 1, 2019 and is fully required to be implemented by June 30, 2020. After that, your Reg BI disclosure document has to be completed and given to all current and prospective clients, put on your web site prominently and other requirements related to how you can deliver it.
Have you ever heard the term, "Someone has you over-a-barrel."? It means that you need their services and you do not have a lot of choice, unless you try and do it yourself. From a capitalist viewpoint, if you need someone's services and they know it, do you really think they are going to charge a low fee? Of course not. They will charge the highest fee that they can get away with. After all, the main release document by the SEC was 771 pages long. Even though the output required is only two (2) pages, your outside compliance expert is going to have to "study up" on those 771 pages.
If you understand these 771 page documents like I do, then you will know that the bulk of 771 pages is an explanation of how the SEC arrived at the Final Rule and their response to comments on the Final Rule that they received when Reg BI was a Proposed Rule. The actual rule starts on page 764 and ends seven (7) pages later on page 771. However, if you do not read the rule and just trust an outside compliance firm to draft this document for you, then undoubtedly they will go on and on about how complicated the rule is and the fact that it is 771 pages long. Of course, they do this to justify their "having you over-a-barrel" fee that they will charge you. Further still, their fee will go up depending on the size of your firm. The bigger the firm, the more they will charge you.
Personally, I can tell you that I have spent at least twenty (20) hours to forty (40) hours on this Reg BI disclosure document. You can figure a $200 hourly rate times 20 hours to be conservative and then you can easily see how much Reg BI will cost firms without someone like me. All this for a (2) page disclosure that pretty much repeats what is already in Form ADV 2A, but adds Conversation Starters.
Can you see how new regulations benefit attorneys and compliance professionals and really do not do much for clients and prospects of investment firms?
Don't you hate people who complain and do not offer a better solution? I do too, so I will offer mine.
A much simpler solution is always staring regulators in the face. If you work for a brokerage firm, then you are licensed as a registered representative. If you work for a registered investment adviser, then you are licensed as an investment adviser representative. The simple solution is if the SEC just said, "if you are a registered representative, then you are a commission advisor. If you are an investment adviser representative, then you are a fee adviser." Industry trade groups would howl at the moon over this simplicity. Of course, there would have to be another rule for dual registrants - those who are both a registered representative and an investment adviser representative. Well, we started simply, but now we are moving to complexity.
What if the SEC said, you have to disclose whether you are a registered representative with commission products for sale? All registered representatives by their nature can sell products that pay commissions. It should not matter that they are dually licensed as an investment adviser representative, because where are the conflicts of interest? With the commission products, of course. Therefore, we can forget about this dual registration stuff and require all registered representatives to be labeled as "registered representative-commissions." Well not quite. If they are dual registrants, like they are today with both licensed as a registered representative and an investment adviser representative, then in order to not have these people howling at the moon, we have to make an exception for them. So, these dual registrants would be labeled as "registered representative-commission and fees."
Now, let's look at investment adviser representatives. Do investment adviser representatives offer products for a commission? Some do if they are also insurance licensed. Therefore, they would have to be labeled as "investment adviser representative-commissions and fees." It doesn't matter whether or not they sell commission products or not, but if they are licensed to do so, then they must be labeled "investment adviser representative-commissions and fees."
Well, what if they are not licensed to sell any commission products? I am glad you asked. This makes it simple. These professionals would be labeled "investment adviser representative-fees."
Our end result is four categories that covers everything.
Doesn't this provide simplicity for clients and prospects? Let's evaluate this.
If you are a client or prospect, doesn't this simplify things for you? Can you not see and understand what type of advisor you have a choice in hiring? The truth is that we do not need the SEC to make this a new rule. I just explained to you the four types of advisers out there, so now it should be easier for you to know who to hire.
If you do not hire me, I hope you hire another adviser. You need our help whether you think you do or not.
By the way, if you need a Reg BI disclosure document for your small registered investment adviser firm (state regulated), then you can reach out to me at (904) 460-2700. I have this down to a science, so I can probably save you a bunch of moolah.
The SEC has passed a new Final Rule called Regulation Best Interest, or Reg BI. This rule requires different things to happen as far as disclosure is concerned. It depends on how the financial advisor is licensed. If they work for only a brokerage firm and not a registered investment adviser, then they have to have a two (2) page disclosure. Insurance agents come to mind for this category.
If they are dual registered, meaning if they are licensed with a brokerage firm and a registered investment adviser, then they have to have a four (4) page disclosure, or they can give 2 two-page disclosures for a total of four pages. One two page disclosure for their brokerage firm and then another two page disclosure for their registered investment adviser firm for a total of four (4) pages. (I hope they do not forget to give prospective clients both two page disclosures, or all four pages!) Big brokerage firms come to mind for this category.
If the adviser is licensed only as a registered investment adviser, then there is a two (2) page disclosure. Both of these required disclosures essentially repeat items currently disclosed in Form ADV 2A documents already required to be disclosed to clients. The new items are called Conversation Starters. The SEC thinks we need to have a conversation with our clients and prospective clients which is a good thing I suppose, but seems a little artificial to me. These RIA's are generally advisers who charge a fee of some type, but as a caveat may also be able to sell commission products.
Now, as a result of this SEC Reg BI Final Rule, we will be adding two pages to our disclosures.
Why is more complexity in the way of disclosures always the answer when it comes to the government, specifically the SEC?
I believe the SEC adds complexity, because it is a way to keep a thriving legal and compliance community in business.
The costs of compliance for brokerage firms is not an issue. They have plenty of money to pay people, or hire outside compliance experts to draft a two or four page Reg BI disclosure for them. In the same vein, large registered investment adviser firms also can hire outside compliance experts to draft the Reg BI disclosure for them.
Where the pain of the Reg BI falls is on smaller firms. Luckily for me, I have thirty-one (31) years of adapting to changing rules and have garnered compliance experience from small brokerage firms, large brokerage firms and several registered investment adviser firms. This is not to say that I am the most expert person on compliance that ever existed, but I have a secret. I can read. When these Final Rules come out, I simply take a very deliberate approach and read these Final Rules over and over again, until I am comfortable with what the disclosure should say. Even then, sometimes when I go through state securities examinations, there are some things that I may have missed. Most of these misses are generally minor in nature, like forgetting to check a box or something, but nevertheless, it shows that even someone with years, even decades of experience does not always get it 100% right.
Now, imagine if you do not have my experience, nor my compliance skills. Reg BI creates a problem for you. The experience and understanding to draft this Reg BI disclosure on your own is either simply not there, or you have more important things to do, like running your business. What is your choice? You have to hire or have on staff a compliance expert to tackle this Reg BI disclosure. If you have to hire an outside compliance expert, then what is that going to cost? If you hire a lawyer, then odds are it will cost more than hiring a compliance firm. Think about this fact. You have a registered investment adviser firm and you have to have this Reg BI disclosure document. The window opens on October 1, 2019 and is fully required to be implemented by June 30, 2020. After that, your Reg BI disclosure document has to be completed and given to all current and prospective clients, put on your web site prominently and other requirements related to how you can deliver it.
Have you ever heard the term, "Someone has you over-a-barrel."? It means that you need their services and you do not have a lot of choice, unless you try and do it yourself. From a capitalist viewpoint, if you need someone's services and they know it, do you really think they are going to charge a low fee? Of course not. They will charge the highest fee that they can get away with. After all, the main release document by the SEC was 771 pages long. Even though the output required is only two (2) pages, your outside compliance expert is going to have to "study up" on those 771 pages.
If you understand these 771 page documents like I do, then you will know that the bulk of 771 pages is an explanation of how the SEC arrived at the Final Rule and their response to comments on the Final Rule that they received when Reg BI was a Proposed Rule. The actual rule starts on page 764 and ends seven (7) pages later on page 771. However, if you do not read the rule and just trust an outside compliance firm to draft this document for you, then undoubtedly they will go on and on about how complicated the rule is and the fact that it is 771 pages long. Of course, they do this to justify their "having you over-a-barrel" fee that they will charge you. Further still, their fee will go up depending on the size of your firm. The bigger the firm, the more they will charge you.
Personally, I can tell you that I have spent at least twenty (20) hours to forty (40) hours on this Reg BI disclosure document. You can figure a $200 hourly rate times 20 hours to be conservative and then you can easily see how much Reg BI will cost firms without someone like me. All this for a (2) page disclosure that pretty much repeats what is already in Form ADV 2A, but adds Conversation Starters.
Can you see how new regulations benefit attorneys and compliance professionals and really do not do much for clients and prospects of investment firms?
Don't you hate people who complain and do not offer a better solution? I do too, so I will offer mine.
A much simpler solution is always staring regulators in the face. If you work for a brokerage firm, then you are licensed as a registered representative. If you work for a registered investment adviser, then you are licensed as an investment adviser representative. The simple solution is if the SEC just said, "if you are a registered representative, then you are a commission advisor. If you are an investment adviser representative, then you are a fee adviser." Industry trade groups would howl at the moon over this simplicity. Of course, there would have to be another rule for dual registrants - those who are both a registered representative and an investment adviser representative. Well, we started simply, but now we are moving to complexity.
What if the SEC said, you have to disclose whether you are a registered representative with commission products for sale? All registered representatives by their nature can sell products that pay commissions. It should not matter that they are dually licensed as an investment adviser representative, because where are the conflicts of interest? With the commission products, of course. Therefore, we can forget about this dual registration stuff and require all registered representatives to be labeled as "registered representative-commissions." Well not quite. If they are dual registrants, like they are today with both licensed as a registered representative and an investment adviser representative, then in order to not have these people howling at the moon, we have to make an exception for them. So, these dual registrants would be labeled as "registered representative-commission and fees."
Now, let's look at investment adviser representatives. Do investment adviser representatives offer products for a commission? Some do if they are also insurance licensed. Therefore, they would have to be labeled as "investment adviser representative-commissions and fees." It doesn't matter whether or not they sell commission products or not, but if they are licensed to do so, then they must be labeled "investment adviser representative-commissions and fees."
Well, what if they are not licensed to sell any commission products? I am glad you asked. This makes it simple. These professionals would be labeled "investment adviser representative-fees."
Our end result is four categories that covers everything.
- Registered representative-commissions
- Registered representative-commissions and fees
- Investment adviser representative-commissions and fees
- Investment adviser representative-fees
Doesn't this provide simplicity for clients and prospects? Let's evaluate this.
- Registered representative-commissions
- These will be brokerage only employees not licensed as investment adviser representatives and will include insurance agents.
- Registered representative-commissions and fees
- These will be the people who love wearing two hats, but they will no longer be able to call themselves investment adviser representatives. We have to make things simple, so, if they have a registered representative license, then that is all that matters. These people can sell commission products and also charge fees for money management and financial planning in any combination or assortment, I might add.
- Investment adviser representative-commissions and fees
- These will be people who are fee and commissions and also wear two hats and charge a mix of commissions and fees in any assortment. The bulk of their business will likely be fees, but they may be insurance licensed and sell some insurance products as part of a financial plan.
- This category could also include primarily insurance agents who sell mostly commission products, but just needed to be licensed as an investment adviser representative in order to advise you to liquidate your brokerage account so they could sell you that 10% commission annuity.
- Investment adviser representative-fees
- This is the clearest and easiest to understand. No commissions allowed. They only charge fees for their advice. This could be an assets-under-management fee, a flat annual retainer fee, or an hourly fee.
If you are a client or prospect, doesn't this simplify things for you? Can you not see and understand what type of advisor you have a choice in hiring? The truth is that we do not need the SEC to make this a new rule. I just explained to you the four types of advisers out there, so now it should be easier for you to know who to hire.
If you do not hire me, I hope you hire another adviser. You need our help whether you think you do or not.
By the way, if you need a Reg BI disclosure document for your small registered investment adviser firm (state regulated), then you can reach out to me at (904) 460-2700. I have this down to a science, so I can probably save you a bunch of moolah.
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