The truth is that there never has been any such thing as common sense regulations when it comes to Registered Investment Advisers (RIA's). Do not get me wrong. I am on the side of disclosure and regulation, because every time you turn around, there is another Ponzi scheme happening. Sadly however, the good guys are stuck complying while the bad guys are out there stealing people's money.
The Securities and Exchange Commission has instituted a new Form for RIA's called a Form CRS which stands for customer or client relationship summary. This is to be kept to two pages by RIA's like my firms.
The Form ADV 2A is also required and that is 22 pages long. The corresponding Form ADV 2B that goes with it is another 14 pages long. My firm's Investment Advisory Agreement is 12 pages.
Of course, because I am a CFP®, I am now subject to even more disclosure to clients. I felt the need to create a new CFP® disclosure document that is 5 pages.
Oh, I almost forgot, if I refer a client to Morningstar to let them manage the client account, then I have to provide their disclosures. This is another 24 pages. But wait. There is more. Morningstar requires a Request for Proposal for each client which varies, but generally you can count on another 20 plus pages.
So, if I take out my trusty HP-12C calculator and add all this up, I come to the laughingly low figure of 85 pages of disclosures.
Oops! I forgot. We have to fill out the paperwork from the qualified custodian, Charles Schwab & Co. Inc. or Fidelity Investments. That will get us up to over 100 pages easily.
Don't you think 85 pages of disclosures is a little too much? Are you going to read all of that from cover to cover, each and every word of it?
See what I mean when I say there is no such thing as common sense these days when it comes to regulations. The good guys are being penalized for the bad guys' bad behavior.
We need to get the requirements down to a simple two or four page requirement and refer the client to our web site if they want more details. That's just my lone opinion from someone out here in the wilderness.
Showing posts with label State Securities Regulators. Show all posts
Showing posts with label State Securities Regulators. Show all posts
Monday, November 25, 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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