Investment advisors are facing new far-reaching regulations out of Washington, D.C., that could increase costs, but they are unlikely to hurt the overall advisory profession.
That was the message that Julia Allecta, partner at Paul, Hastings, Janofsky & Walker, had for attendees at Tiburon Strategic Advisors conference in late April.
Advisors will have to "meet (specific) requirements to call themselves" financial planners, wealth managers and a variety of other terms often used interchangeably among professionals, said Allecta, who is considered the legal mastermind behind the creation of Charles Schwab's OneSource mutual fund program.
One rule that probably will affect all RIAs is the requirement that advisory firms have a written compliance program in place and that they appoint a chief compliance officer. This clearly will add a significant cost burden at smaller advisory firms. It also explains why compliance consultants are commanding new premiums when they bill their fees these days.
Even more substantive changes may be in store for mutual fund complexes, Allecta predicted. "The bull market hid a lot of sins," like high expenses, and she noted that Congress is acutely interested in the fund business, since 60% of Americans and "probably 85% of voters" own them.
The mutual fund industry scandals have revealed cracks in mutual funds' infrastructure. "Americans love hidden costs and bundled products, like buying a refrigerator and putting it in your 30-year mortgage," Allecta explained. "New regulations will increase transparency, but they won't completely unbundle mutual fund fees, and they won't alter the basic structure of collective investing. Payment streams will be rearranged. Disclosure continues to be the primary theme even though no one reads the prospectus." Soft dollar payments could also get unbundled.
Allecta also noted that the mutual fund business is a very high-margin business and regulators, aware of this, are seeking to "slim" those margins.