Two Hats and Two Faces

The entire financial services industry has been waiting for what has been termed “sweeping” regulatory change for close to a year since the fallout of the financial crisis began. It reminds me of the old Heinz ketchup commercial set to the tune of “Anticipation”. You know the lyrics…”Antici-pay-ay-tion...It’s making me late…keeping me wa-a-a-iting”... while the commercial shows nothing coming out of the ketchup bottle as it is shaken. It kind of feels the same with regulatory reform. We’ve been shaking the proverbial regulatory bottle, but nothing is coming out. And there's been a great deal of anticipation. Finally this week, it appears that we’re at last seeing the regulatory bottle start to give us some drips.


Naturally, everyone is attempting to evaluate how changes will affect their particular business, whether they be SEC or State regulated advisors, B/D Reps, insurance professionals and financial planners. From comments made by Mary Shapiro this week, it’s clear we’re headed towards a harmonized and not watered down fiduciary standard for all who give investment advice. Isn’t this what the fee only advisor has been arguing for and the B/D’s have been fearing? Well…not really. The fee only crowd had thought that by fiercely arguing to keep to the highest fiduciary standard, it would somehow repel B/D’s and FINRA, the 900 pound gorilla that regulates them. The objective?...keep them separate and as far away from the advisory business as possible. But I'm afraid for them that this may have been a gross miscalculation.


While in New York recently, I visited a CEO of a large 12,000 registered rep organization to hear his perspectives on the regulatory issue among other things. I asked, “Aren’t you concerned about the effect a fiduciary standard will have on your field force?” His response may seem surprising except to those of us who have been under the thumb of FINRA for some time. He said, “As a large highly visible organization, we’re already held to the highest standard. A harmonization will actually give us a competitive advantage and make our business easier”. I’m fairly sure CEO’s and distribution heads of the country’s largest FINRA regulated organizations feel the same way. While on paper, one would assume that a fiduciary standard is more restrictive and consumer focused than the suitability standard of care, in practice, not so much. And so I don’t completely lose and offend my fee only friends, I’m not saying a fiduciary standard is a lower one, just that there is little in place to hold one accountable to that higher standard.

In the late 90’s, I headed an initiative to transist a national field force into fee based financial planners. This involved re-licensing and retraining an entire sales force numbering in the thousands, while changing their product offerings, compensation and recognition. Because the lawyers had an absolute fear of the field force holding themselves out as planners but really only acting as salespeople, our process built a Chinese wall between advisory activity (the planning) and the implementation of the plan (product recommendations). One would think that the fear would come from the SEC who is to hold investment advisors to the higher standard…right? Nope, the SEC was no where to be found. The fear was from FINRA which not only breathes down the necks of registered reps, but also rep’s who offer advice. A product recommendation (aka sale) couldn’t even be made until the client had signed off on a final plan which took up to 3 to 5 separate meetings, often resulting in no product implementation. In this sense, it was viewed that we were wearing two hats. First the investment advisory hat while planning, and then the Registered Rep hat while making product recommendations. But we all knew, the only regulatory body holding us accountable was FINRA for all our activities. And it’s my bet that the fee only investment advisor knows this. While RIA's will pontificate about not wanting to be watered down to a standard and regulator set up for salespeople, what they’re really thinking is how ominous it would be to have a regulator hold them to ANY standard. Enjoy the benefits of the public perception a higher standard gives, but have no serious accountability for doing so. It looks kind of two faced to me.

So, while the regulatory changes unfold, I think the impact will be far greater on the non FINRA registered RIA who heretofore has had very little accountability and not on the large FINRA regulated firms already held accountable to a very high standard. The FINRA rep’s will be happy to toss one of the two hats in favor one big hat. The challenge will be fitting that one big white hat on two faces.