A coalition of financial advisor industry groups today resumed its assault on the Financial Industry Regulatory Authority's (Finra) cost estimates on creating a self-regulatory organization (SRO) to review investment advisors.

The Financial Planning Coalition (FPC) claims that Fina significantly underestimated an SRO's projected annual overhead costs and overestimated how many investment advisors a SRO examiner would be able to review in a given year.                      

The FPC this month commissioned the Boston Consulting Group (BCG) to compare its SRO cost estimates to those released by Finra on April 25. The FPC had commissioned the BCG to estimate SRO startup cost last year. The FPC includes members from the Certified Financial Planners Board, the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA). TD Ameritrade Institutional and the Investment Advisor Association (IAA) also sponsored the BCG study.

"We believe that the review of Finra's cost estimates confirms the independent economic analysis conducted by BCG last year," according to the FPC statement. "We think it would be a mistake to add an unnecessary layer of regulation and cost on small businesses that deliver sound advice to investors. We continue to believe that oversight of investment advisors should stay with the SEC, the most cost-effective alternative."

Finra officials, however, maintain that BCG's cost estimates don't hold water. "Concerning the release of BCG's review of the FINRA's cost estimates-until the Boston Consulting Group has at least one conversation with the SEC and FINRA about what it takes to run a nationwide examination program, their numbers should be viewed with skepticism and amusement. They are inventing the numbers out of thin air," said Finra spokeswoman Nancy Condon in an e-mail statement. 

The FPC fired its first salvo against Finra in late April, claiming Finra's estimated SRO startup costs were 15 times less than BCG's estimate.

Finra had reported that it would cost up to $15 million to start an SRO, and about another $150 million in annual expenses going forward. But BCG estimated it would cost between $200 million and $255 million to create an SRO and $460 million to $510 million a year to operate it.

Finra's SRO cost estimates were also released April 25, the day House Financial Services Committee Chairman Spencer Bachus, R-Ala., and Rep. Carolyn McCarthy, D-N.Y., unveiled a bill that would authorize the creation of one or more SROs to oversee the financial services industry. All advisors with retail clients would have to belong to one of the associations and pay membership dues. Finra, the independent agency that currently monitors all independent advisors in the U.S., is in the running to be the body to create one or more SROs.

The BCG recently compared its own SRO cost estimates with the estimates released by Finra. Highlights include:

Finra's estimate omits the cost of SEC oversight ($90 million to $100 million) and the cost of enforcement ($60 million to $70 million), both of which are required by the legislation.

Finra's estimate of $12 million to $15 million in setup costs does not include staff costs incurred during the 12-month setup period, specifically the cost of examiners and support staff. Finra only includes these expenses as part of its ongoing investment once the SRO is up and running. This omission accounts for $180 million to $230 million of the difference between the BCG and Finra estimates.

Finra's estimate of the annual cost to examine 14,500 investment advisory firms once every four years assumes that Finra examiners would be able to nearly double the productivity rate of current SEC examiners, by performing five or more examinations per examiner per year. This compares to SEC examiner productivity of three per year, and Finra broker-dealer examiner productivity of 2.8 per year. This productivity assumption accounts for $150 million to $170 million of the difference between the BCG and Finra estimates.

Finra's estimate does not include overhead costs in its estimate of $150 million to $155 million of ongoing annual investment. Overhead costs account for $135 million to $140 million of the difference between the BCG and Finra estimates.

A side-by-side comparison of BCG's and Finra's cost estimates can be found at FPC's Web site at www.financialplanningcoalition.com.

-Jim McConville