John Lefferts' Blog

Friday, July 3, 2009

"Whistling Through A Graveyard"

The Financial Regulatory Reform whitepaper released in June has produced some interesting responses from the retail financial services business, depending on which breed of player they are. The business is fragmented to say the least, which is exactly why reform is needed. There are the "holier than thou" fee only advisors who claim to adhere strictly to the fiduciary standard and view themselves not as salespeople, but professionals. This while a full 1/3rd of Ponzi schemes come from the thinly regulated RIA model as the majority of them have given in to the easy money of investment management acting more like sales people than, well...salespeople. They don't want to be lumped together in regulation with salespeople because that would frankly blow their cover. Then there is the non-FINRA registered insurance agent who is so far under the regulatory radar, they aren't even required to give fingerprints to their state regulator in most cases. Selling 12% commission annuities will be tough for these folks to justify in a fiduciary world. Then there is the wirehouse broker who, if not for selling their financial souls for high upfront signing bonuses, would prefer to be somewhere else. Merrill's distribution head was recently quoted saying, "brokers who leave give up a global brand identity"...was he serious? Next are the insurance based broker/dealer brethren who can read the writing on the wall: in a regulatory world holding to a fiduciary standard, the proprietary insurance distribution model has no economic reason for being. Then the Independent B/D's, the vast majority of them lacking the scale, resources and technology to remain in business. With revenue sharing deals likely to go away or at least become less rich, it leaves most financially under water-not a sustainable business model.

Most of us can see that change is coming and that it is much needed. But I'm reminded of the quote, "Our dilemma is that we hate change and love it at the same time; what we want is for things to remain the same, but get better" We want everyone else to change so that we don't have to. But as we know, it doesn't work that way. Everyone is simply "Whistling through a graveyard" knowing change is coming, scared of it, but moving on in the same way not changing a thing.

Here's what we know; the financial crisis and multiple Ponzi schemes uncovered has exposed cracks in the regulatory system, and it is going to change. And the Obama administration set it in motion in June with the blueprint for regulatory reform which clearly states:

The SEC should be permitted to align duties for intermediaries across financial products. Standards of care for all broker-dealers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers. In addition, the SEC should be empowered to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest.

Every financial intermediary and special interest group has its own interpretation of what this means. And their interpretation and argument is, you guessed it, not to change anything wanting everyone else to change so they don't have to; an unlikely scenario. The SEC has been given broad powers here. And the SEC under Mary Shapiro, who has long lobbied for all financial sales/advisors to be regulated under the same regulatory roof, presumably FINRA, will more than likely get their way.

So here we are, playing a giant game of "who's your daddy" . Let's face it, the 900 Lb Gorilla is FINRA. Whether we like it or not, that's where the financial sales and advisory business is headed as regulations are harmonized. It's time we, regardless of which breed of financial services player we represent, stop arguing against inevitable change and start becoming part of the solution in helping mold the new regulations so they don't end up worse that what we've had before. Let's place the focus where it should be, on the consumer and clients, and develop the distribution models and regulations around them.

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