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."