NAPFA currently has roughly 2,100 members. To attain membership, applicants pay $475, submit for review a recent comprehensive plan for a client, agree to offer comprehensive financial planning and sign a fiduciary oath. Members also must complete 60 hours of continuing education. On January 1, 2010, all NAPFA members will be required to hold the Certified Financial Planner designation.

But CFP certification and vows of fiduciary fidelity don't provide ironclad protection for clients. "As one of our members said, criminality isn't something you can protect against," Lassus adds. "What you can do is set the bar very high, monitor behavior and make sure those folks don't remain as members."

Compliance Concerns
There's a lot of buzz these days about potential changes in compliance rules and the impact on advisors. Perhaps the most pressing concern centers on the Securities and Exchange Commission's proposed amendments to the custody rule that would require all SEC-registered investment advisors to hire an accounting firm to perform an annual surprise audit. The rule would apply to all investment advisory accounts where the advisor has any form of custody, including the ability to deduct advisory fees directly from client accounts.

"It will be burdensome, particularly on smaller firms," says Jarrod James, vice president at RIA Compliance Consultants in Omaha, Neb. He notes that a firm with $500 million in assets under management and 100 high-net-worth clients would be less affected than a $100 million firm with 1,000 client accounts that need auditing. "That's where accounting costs could get into the tens of thousands of dollars every year," he says.

"I've talked to people who aren't even aware of the rule," James says. The commentary period closes July 28, and as of mid-June he says only about 50 people had posted comments on the proposal, most of those coming from consulting or legal firms. "Now is the time to tell the SEC that the costs [of the custody rule amendment] are too high," he says.

Elsewhere, a recent report by TowerGroup predicts a new regulatory structure that would include FINRA audits of registered investment advisors, which in turn would mean higher compliance costs.  The report, Broker vs. Advisor Regulation: It's the Principle of the Thing, anticipates dramatic changes in the rules governing brokers and advisors-in large part because regulators can't keep up with the rapid growth of the RIA market as breakaway brokers bolt to the independent, fee-based side of the business. There isn't a self-regulatory organization (SRO) for the roughly 11,000 RIAs, and their oversight body, the SEC, "has proven to be outmatched by their sheer number," says the report. 

Brokers are governed by more rules than RIAs, entailing more reporting requirements. RIAs, on the other hand, follow the principles-based fiduciary standard that "has an eloquent definition and the requisite altruistic notion of consumer protection," says the report. "In practice, however, it is proving difficult to police."  The solution, at least according to TowerGroup, will be a mix of rules-based and principles-based regulation for both brokers and advisors that would result in FINRA examiners conducting RIA audits, under the oversight of the SEC. 

"What's the alternative [to FINRA audits of RIAs]?" asks Matthew Bienfang, TowerGroup's senior research director of brokerage and wealth management, and the report's author. "RIAs wish to have nothing happen at all, and that won't happen. The next most preferable outcome is to have their own SRO, and that also won't happen because none of them can pay for it."

The brokers' SRO, FINRA, gets its operating budget from its members. Unless Congress, which sets the SEC's operating budget, is willing to fund an agency for the governance and oversight of RIAs, it probably won't come about, Bienfang says.

TowerGroup expects that greater rules-based reporting requirements could add 10% to 20% more compliance costs to RIA firms. And smaller firms will feel the biggest squeeze. The report estimates that RIA firms with less than $100 million in assets under management currently spend between $6,000 and $35,000 annually on compliance costs. And that doesn't include labor and opportunity costs when advisors do their own compliance work.