A report released Monday by TowerGroup predicts a new regulatory structure that would include FINRA audits of registered investment advisors, which in turn would mean higher compliance costs for RIA firms.

The impact of these changes, says the Needham, Mass.-based financial services consulting company, could also mean more business opportunities for large platform providers serving RIAs.

The report, Broker vs. Advisor Regulation: It's the Principle of the Thing, anticipates dramatic changes in the rules governing brokers and advisors. And a big reason for that is 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 SEC's operating budget] is willing to fund an agency for governance and oversight of RIAs, it probably won't happen, 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 to $35,000 annually on compliance costs. And that doesn't include labor or opportunity costs when advisors do their own compliance work.

TowerGroup believes broker-dealers can better handle regulatory changes because they already employ "relatively robust"  rules-based programs such as Actimize, SunGard Protegent or workflow tools offered by clearing partners such as Pershing or National Financial.

But if brokers are required to adopt a fiduciary standard--FINRA CEO Richard Ketchum recently called for the standard for all advisors--they will have to either build technology for fiduciary oversight and transparency, or have vendors do it for them.

"The fiduciary standard is very open-ended," Bienfang says. "There's a lot of judgment within that standard of what's in the best interest of the client. I don't know how you can map that out with programming language."

Similarly, RIAs will have to rely on more extensive compliance reporting tools to meet the expected regulatory changes. According to Bienfang, some platform providers don't currently provide RIAs with enough tools to meet tougher reporting requirements. But that could easily be rectified.

"RIA platforms are basically the same as those used by brokers," Bienfang says. "So there are a lot of tools and capabilities on the broker side that could be transferred to the advisor platform, and some do that already."

And platform providers that roll out value-added programs to help customers better handle expected regulatory changes will further ingratiate themselves with their clients, Bienfang says.

Ultimately, TowerGroup believes a new regulatory landscape is needed because neither the broker nor the advisor model are going away, and the industry needs to harmonize its rules mitigate confusion between the two camps.

"We don't believe there can be a single standard," Bienfang says. "I believe the principles-based model is superior, but there will always be a need for brokers who sell a product."