Should Finra be given responsibility to regulate RIAs? Should a fiduciary standard be extended to apply to Finra-regulated advisors as well as registered investment advisors?

These questions are confronting the financial advice industry in the midst of a seismic shift that is reshaping its landscape.
As reported last month, the Financial Planning Association has suffered a 15% decline in membership over the past five years while other membership organizations for financial advisors enjoyed strong growth. The FPA's slumping membership-a spokesman says it's losing about 50 members a month net of new members joining-is occurring as rival membership organizations for advisors, such as the Financial Services Institute, the Investment Management Consultants Association and the CFA Institute enjoy growth in membership.

This month, we'll examine more closely the shifting landscape of the financial advice business and the positions the CFA Institute, the FSI and the IMCA are taking on regulatory reform and on the promulgation of a single fiduciary standard for all advisors.

In a shift that is reshaping the U.S. financial advice industry, advisors are increasingly choosing to become chartered financial analysts. The financial advice business has long been dominated by brokers and, in recent decades, by a growing cadre of certified financial planners. However, a shift in the character of financial advice is under way, with growing numbers of CFAs moving into the investment advice business.

The FPA's slide follows several years in which it took bold positions that alienated some in its traditional membership base. The association successfully sued the Securities and Exchange Commission to end the exemption of brokers registering as RIAs. It supported regulatory reform that would apply the fiduciary standard of the Investment Advisers Act of 1940 to registered representatives. And it opposed the naming of Finra as the self-regulatory organization responsible for overseeing registered investment advisors.

Interestingly, growth in the number of CFPs was anemic in 2008, and in 2009 it sank to the lowest level in at least a decade. The slump could be dismissed as temporary, but it contrasts with the growing number of CFAs moving into private wealth management, which could mean that the FPA's membership woes may be tied to a more significant trend away from financial planning and a growing embrace of other approaches to wealth management. In other words, the growing popularity of the CFA designation and its approach to wealth management could be coming at the expense of the financial planning movement.

The CFA Institute, the accrediting body of the CFA designation, says the number of its charterholders in North America doubled in the past decade to 49,000. The fastest-growing segment of the North American membership is private client advisors working with high-net-worth individuals. Moreover, the number of CFA candidates is soaring. About 105,000 North American candidates are enrolled in the CFAI's education system, and an additional 120,000 candidates are enrolled in the program outside of North America. About 30% of them are expected to move into private wealth management. Since about 20% of those who begin the CFA education program complete it, this translates into about 2,500 new U.S. CFAs annually moving into wealth management. That figure rivals the number of new CFPs entering the advisory field.

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The CFAI's ascendance is likely to influence the financial advice industry in important ways. Groups like the CFP Board, the FPA, the FSI, the IMCA and the CFA Institute are influential because they educate professionals and take positions on regulatory and professional issues. They represent important centers of influence in the financial advice industry. They support the intellectual underpinnings and methodologies used by financial advisors in their practices, and they are the advisory industry's advocates.
How will the rising influence of these groups affect debate about the regulation of advisors and the adoption of a fiduciary standard for all of them? In the IMCA's case, not much. The IMCA takes no position on regulatory issues; it has no advocacy program.

If the IMCA took a position on the fiduciary standard or on Finra's bid to supervise RIAs, it would alienate one of two large membership segments: RIAs or wirehouse brokers. Taking a position in opposition to a large segment of your membership can be risky for membership associations, as the FPA has learned from taking positions in opposition to wirehouse reps, broker/dealers and registered reps and suffering a concomitant decline in membership deeper than in previous recessions.

The IMCA, which has 8,000 members, has traditionally been popular with brokers at wirehouses, but its fastest growing segment is RIAs. The wirehouse advisors in the IMCA commonly work in the consulting division or private client group of the giant brokerages, and they specialize in serving high-net-worth clients, those with a net worth of $1 million to $5 million, and ultra-high-net-worth clients with wealth in excess of $5 million. These advisors, who generally operate in teams, represent one of the most profitable slices of a wirehouse sales force, and they are also the most likely to become independent.

The IMCA licenses about 6,000 advisors as certified investment management analysts, and it recently began offering a new certification program for "certified private wealth advisors," a designation for those who offer comprehensive wealth management advice to high-net-worth clients. As long as the IMCA respects the wirehouses by not advocating positions on behalf of independent advisors, the wirehouses are likely to continue to promote the IMCA to their sales forces. The bottom line is that the IMCA has little to gain from taking advocacy positions and its relatively small size allows it to remain silent on controversial professional issues reshaping the financial advice industry.

The CFAI is entirely different. It's too big to fail. It must take a position because of its role in the financial services industry and growing presence in the financial advice segment of the business.

The CFAI's role in the financial advice industry is a little different from that of the FPA, the IMCA or other membership groups targeting financial advisors. The CFAI's influence on professional and regulatory issues is greater than that of the FPA, the CFP Board of Standards, the National Association of Personal Financial Advisors, the National Association of Insurance and Financial Advisors and other relatively small membership bodies serving advisors. That's because of the CFAI's history as the professional organization for Wall Street stock and bond analysts. Its promotion of reporting standards for investment managers and institutions, its analytical approach to accounting statements and its role in training Wall Street research analysts make its standing among government and private institutions more akin to that of the American Bar Association or the American Institute of CPAs.

That's not to say the CFAI has always been a beacon of light to the financial services industry. After the tech bubble burst in 2000, Wall Street stock analysts were assailed for feigning objectivity while writing favorable research reports for their firms' investment banking arms. And it was the CFAs at rating agencies who sold corporations and municipalities favorable credit ratings on flimsily backed bonds and derivatives.

But regulation-for instance, the global analyst research settlement-cleaned up the mess and undoubtedly taught the CFAI an important lesson about getting in front of advocacy issues. In addition, with about 30% of CFAs now reporting that they provide private wealth management services, the CFAI in the U.S. over the past decade has been transformed into a more advisor-centric organization.

The CFA Institute about a decade ago changed its name from the Association of Investment Management Research. The AIMR was best known to advisors for its initiatives in creating performance-reporting standards for investment managers, and it also played an important role in regulatory issues related to Wall Street analysts. Its private wealth membership division did not exist, and this part of its membership was too inconsequential to merit its own educational programs and committee structure. I remember, as a reporter at Dow Jones Investment Advisor, calling the CFAI in 1999 to ask about its financial advisor members, only to learn it did not have programs geared to wealth managers for high-net-worth clients.

That's changed. The CFAI now has positions on the most controversial issues affecting advisors.

On the issue of whether Finra should become the self-regulatory organization for RIAs, Kurt Schacht, the managing director of the CFA Institute's Centre for Financial Market Integrity, says the CFAI would have preferred that the SEC remain the sole regulator of RIAs.

Schacht, in mid-April, said he had just returned to New York after spending a week in Washington where he and CFAI board members spoke with the SEC and congressional aides about likely legislative reforms and the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Schacht, who has an undergraduate degree in chemistry, worked as a securities lawyer and served as chief operating officer and general counsel at a hedge fund before joining the CFA Institute and earning the CFA designation. He's a member of the standing advisory group of the Public Company Accounting Oversight Board and serves on the SEC Advisory Committee on Smaller Public Companies.

Schacht lays out the CFAI's position on regulatory reform and the fiduciary standard this way: He says the CFAI supports self-funding for the SEC. Realistically, however, Schacht says that such funding is not likely to come out of Congress, which seems a fair assessment. With Washington currently debating massive spending cuts and a presidential election just about 18 months off, it seems unlikely that the SEC will be funded with the hundreds of millions of dollars it needs-even to police the much-distrusted Wall Street.

Schacht says RIAs are under-examined. "The numbers are pretty depressing," he says. "There's something like 480 people in the SEC's Office of Inspections responsible for examining 12,000 investment advisors." The SEC is simply underfunded.
Schacht says "outsourcing" examinations is likely going to be the solution backed by Congress. By outsourcing, he means giving responsibility to conduct examinations to an SRO. While the CFAI would have preferred giving the SEC adequate funding, "If that's not going to happen," says Schacht, "what's best for market integrity is that someone is examining this profession on a more regular basis, and if that has to be Finra, then so be it."

On the fiduciary standard issue, the CFA Institute is similarly pragmatic. Schacht says the CFA Institute would like to see a single fiduciary standard applied to all advisors-whether they're affiliated with a broker/dealer or an RIA. He says that standard should be applied whenever investment advice is being provided and should be based on the precedents set under the Investment Advisers Act of 1940.

But Schacht says there is little chance that rules or legislation to implement a single fiduciary standard will move forward anytime soon. "Adoption of a single fiduciary standard has been put off because of all the other things that have to be done in Dodd Frank," says Schacht. "There's a great deal of political opposition to the SEC going forward from a number of people in the House Financial Services Committee, and the path of least resistance for the SEC is to put [the fiduciary standard] back at the end of the line and move on with other issues of regulatory reform."

Adds Schacht, "Any decision has been postponed."

If legislation is proposed that would expand the fiduciary standard to brokers, Schacht says a number of Republicans in Congress told his group that they would ask for additional study on the issue. "They're not convinced there is any significant problem that we are trying to solve," he says.

Schacht says the fiduciary standard issue is complicated by the role of broker-dealers and their registered representatives. When an advisor is dually registered with the SEC as both an investment advisor representative and as a registered representative working for a B-D, his client needs to know if he is a fiduciary. But clarifying that line, with all of its permutations and applications in different client-advisor situations, will take careful consideration. "So we either make it really clear when the advisor is acting as a fiduciary right now, or we hold off and debate this later," says Schacht.

The FSI, meanwhile, has a strong advocacy arm and has gained influence in recent years. With 16,000 individual members and 126 B-D members, it's a small group compared with the CFA Institute. "FSI supports the fiduciary standard of care," says David Bellaire, the organization's general counsel and director of government affairs. "What we have urged, though, is that it be carefully implemented to limit its impact on investors as to professional advice and their choice of service providers."

Bellaire says that if a fiduciary standard is put in place that drives up costs for B-Ds and their reps, then advisors are going to be unable to serve investors in the middle market-the mass affluent and investors besides the wealthy. Bellaire fears that if the fiduciary standard now applied to RIAs is applied to B-Ds, many financial advisors will decide that sub-high-net-worth clients are not worth the risk and the associated costs required to give those clients service in that fiduciary capacity.

"If we simply apply all of the RIA requirements to B-Ds," says Bellaire, "we can expect to see B-Ds establish minimum asset requirements and, as a result, a large segment of the investing public will be left without advice and service. It won't be worth it for an advisor to help a client open his first IRA with $5,000."

Bellaire says some rules would need to be changed in applying the fiduciary standard imposed under the Investment Advisers Act of 1940. "We recommend a new standard of care with a much more effective client disclosure system that keeps costs down," he says. For example, Bellaire says, instead of presenting a 15- or 20-page Form ADV at the start of a client relationship and annually thereafter, "we've suggested a three- or four-page disclosure form at the time of an engagement, akin to the summary prospectus, and if the client wants more information it can be made available on the advisor's Web site."

Bellaire says a double standard currently exists that in some ways favors RIAs, and that the FSI has been unfairly accused by some trade groups of proposing changes that would water down the fiduciary standard.

"Form ADV requires RIAs to disclose conflicts of interest, but it does not require RIAs to disclose that a guy down the street charges less and has better investment performance," he says. "Yet some critics act as if we are watering down the standard if we do not require B-Ds to sell only their least expensive product. The '40 Act fiduciary standard does not require that an investment advisor only do business with clients where it is the lowest cost and best provider, and it allows the RIA to simply disclose the fact that other RIAs may perform better and charge less."

Bellaire says clients should simply be given full disclosure and then make a decision about what to buy and which advisor to work with. "Sometimes, the lowest cost option is the best one," he says.

"The '40 Act fiduciary standard allows conflicts to exist as long as they are disclosed and a client can make an informed decision," he says. "What we are advocating for is that the same standard of care be applied to B-Ds in a thoughtful way that keeps costs down. We don't want to undermine the standard, but do want to see it get to the point where it operates in the B-D model for benefit of clients."

Bellaire says that the questions of whether to apply a single fiduciary standard or make Finra the self-regulatory body for RIAs are intertwined. "We've been making the point on the Hill that these two items are closely related and we won't be solving one without solving the other," he says.

The FSI is actively lobbying to make Finra the SRO for RIAs, and it wants to see a fiduciary standard adopted that would be favorable to broker/dealers. "We envision a separate entity under Finra's umbrella with its own governance structure, a board with a majority of public members with industry representation," says Bellaire.

Bellaire says the SRO administered by Finra would add to its exam staff individuals with knowledge of the RIA business. "Finra would leverage its existing district structure to perform routine exams of advisors," he says. Bellaire noted that Finra chief Richard Ketchum has said the new Finra entity would not engage in significant rule-making for several years while exams are performed.

"They see that as their primary focus, routine exams," says Bellaire. "And from our perspective, that is essential so that the fiduciary standard RIA advisors are held to is not a hollow promise to investors. Right now, we have investment advisors who tell the public I am held to a higher standard of care and that the way I practice is in your interest, but the truth is, no one ever comes by to verify that's actually happening and that they are living up to their obligations."

Like Schacht, Bellaire believes any movement on these two questions is now unlikely for months. He says the SEC will be tied up for at least a couple of months on studies required under the Dodd-Frank law. And then the drafting of new rules for implementing the fiduciary standard will begin in earnest. In the meantime, Bellaire says one of the SEC commissioners, Kathleen Casey, will reach the end of her term and a new appointee will have to be named and come up to speed on these issues. Also, the commission is split 3 to 2 on the fiduciary standard issue, and commissioners usually do not like to push ahead with rule-making when there's a split.

"There is certainly a desire at SEC to move forward, but I think there are some hurdles in the way of rapid progress," says Bellaire.    

Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.