When the International Association For Financial Planning (IAFP) merged with the Institute Of Certified Financial Planners (ICFP) 12 years years ago, members of both groups hoped the new 30,000-member strong organization would at long last allow the profession to speak with a single voice that could give it the clout to hold its own with other powerful segments of the financial services business.
As the debate in Washington, D.C., this week over RIA regulation illustrates, that unity never materialized. In retrospect, maybe it never had a chance, even though with visionary leaders like Roy Diliberto and Elissa Buie it sure looked liked all systems were go from the start.
Appearances, however, can be deceiving. According to one former FPA president, members were talking behind the scenes about undoing the merger almost as soon as the knot was tied. The potential for the single organization to expand its presence by raising vastly greater sums from product sponsors caused visions of sugarplums-and expanded service offerings-to dance in the minds of some members. But the divergences always extended way beyond the FPA itself or, for that matter, forms of compensation and business models.
At that time, it wasn't just traditionalists who resented the new association moving in another direction even if, in reality, it was simply struggling to find its way. I recall walking into the middle of a general session at the FPA's first annual conference in Boston in September 2000 as streams of advisors headed for the exits as author Harry Dent shamelessly flogged his new UIT consisting largely of tech stocks that were about to crater.
The decision in 2003 by the FPA to spin off the old IAFP broker-dealer division into the Financial Services Institute (FSI) made sense for both advisors and brokers. Both groups had separate agendas and good reason to pursue different goals on their own.
In the middle of the last decade, the FPA displayed a lot of guts when it sued the SEC over the so-called "Merrill Lynch" rule in which the agency, under severe political pressure from wirehouses, claimed that brokers who give financial advice on an incidental basis shouldn't be held to a fiduciary standard. Amazingly, the FPA defeated the SEC in administrative court. Some of the most passionate advocates of the FPA's position ironically were folks who held brokerage licenses and didn't think commissions, accompanied with appropriate disclosure, threatened his objectivity.
But the victory exposed the fissure between the RIA and brokerage communities and the two groups drifted further apart. Few issues have divided the financial planning community like the future regulation of RIAs. Over the last decade, Finra-regulated advisors have chafed at increased reporting demands and restrictions, complaining that the self-regulatory organization wanted to turn them into automatons who could only offer cookie-cutter solutions to clients with complex financial needs.
Some call them ex-brokers, others say advisors, but both independent broker-dealers and wirehouses have lost financial professionals to the RIA space because these folks want the freedom to serve their clients as they, not Finra, sees fit, and because the economics of the RIA space has the potential to create more business value.
Folks in the Finra-regulated arena feel they are subject to an unlevel playing field and associations like FSI and SIFMA are urging Congress replace the Securities and Exchange Commission with Finra as the regulator of RIAs. However, despite support from some members of Congress, that appears to be a long-term project.
The sad truth is that neither the SEC nor Finra has performed particularly well regulating either the advisory or brokerage businesses. It's hard to see how an optimal solution emerges or how investors come out the winner.
Today, virtually all the participants on both sides embrace a fiduciary standard of sorts. After all, what kind of investor would want to work with a broker or advisor who claims he wants to put his own interests ahead of clients.
But defining what that fiduciary standard is lies at the heart of this chasm and there are few signs that either side wants to compromise. There are even fewer signals that Washington will resolve the issue.