Finra's estimated costs for launching and operating a self regulatory
organization (SRO) to oversee financial advisors is 15 times less than a consultling group's estimate from last year.
Finra said yesterday it will cost up to $15 million to start an SRO, and about another $150 million in annual expenses going forward. The Boston Consulting Group (BCG), however, estimates it would cost between $200 million and $255 million to create an SRO and $460 million to $510 million a year to operate it.
The Financial Planning Coalition (FPC) commissioned the BCG to calculate an estimated 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).
On Wednesday, 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.
FPC officials contend that Finra's SRO cost estimates are grossly understated. "Clearly, we are not comparing apples to apples. This [Finra] cost estimate document raises more questions than it answers," according to a FPC statement.
"It's hard to compare Finra's page-and-a-half analysis, which lacks any backup assumptions or data, with the comprehensive, 38-page BCG study, which used publicly available data, including Finra's actual costs, the SEC's actual IA (investment advisor) examination costs and was based on rational and fully disclosed assumptions," the FPC statement said.
The FPC claims that Finra used different assumptions regarding examiner productivity and cost per examiner than that used by its own current, publicly available data.
The FSC also claims that Finra left out the cost estimates for the legally required oversight by the Securities and Exchange Commission (SEC), which the BCG estimated at $90 million to $105 million and which is an essential component of the overall cost of an SRO. Finra also didn't include the $130 million in annual enforcement costs that are required under the Backus-McCarthy legislation, according to the FPC.
The FPC contends that Finra's low SRO cost estimate "raises concerns about its independence and ability to understand and meet the unique needs of [advisors] and their clients."
In response, Finra claims that the BCG's estimates incorrectly assume the SRO will be built from scratch. "While Finra would need to hire additional staff to serve as an SRO for investment advisors, we believe BCG vastly underestimated our ability to leverage existing staff, district offices and the technology underlying our existing nationwide examination program," according to the statement.
Finra says it based its estimates on a universe of 14,500 financial advisory firms and an anticipated staff increase of about 900 people, the vast majority of which would be examinations staff.