Big Government Gets Bigger

Whatever happens in this year‚s elections, it‚s an unavoidable fact that government is becoming a bigger part of our lives. That‚s true whether you look at the macro picture, where both federal spending and government‚s share of gross domestic product are increasing, or the micro picture for financial advisors, who don‚t have to be told about the growing government involvement in their daily working environment.

A recent study by AdvisorBenchmarking Inc., a subsidiary of Rydex Investments, pinpointed just how dramatic this phenomenon is. Between 2002 and 2003, the RIAs surveyed saw their median revenues rise 15.4% while median profit margins shrank from 31.6% to 25.9%. Why? For starters, the cost of legal compliance soared 152.9%, from 2.4% of total expenses in 2002 to 6.1% in 2003. I dread to think what that figure will be for 2004.

At the national level, one had to expect–even welcome–a significant rise in government spending on homeland security after the events of September 11 exposed how vulnerable a free society is to terrorism. Within the financial services business, many ethical advisors say they understand why the government has increased its regulatory scrutiny in the wake of the scandals that swept through Wall Street in the late 1990s.

At the advisory profession level, there were very few abuses of consumer trust, much less outright fraud, in the last decade. But unfortunately, many regulators barely understand the difference between stockbrokers, financial planners and investment advisors.

The growing importance of government in this profession‚s existence is one reason why the CFP Board Of Standards probably made a good choice in selecting Sarah Ball Teslik as its new CEO. She has more than 19 years of experience in Washington and may need that and some more. Because the more Washington‚s tentacles expand, the more power gravitates toward entrenched special interests, not the public‚s interest.

Last month in this space, I praised the Financial Planning Association‚s decision to sue the Securities and Exchange Commission over its proposed rule that would exempt the nation‚s largest wirehouse brokerages from certain fiduciary responsibilities associated with investment advisory regulation when they engage in advisory activities, such as opening fee-based accounts. It seemed to me that the FPA would emerge as a winner from its bold decision, regardless of whether it convinced the SEC to drop the rule or not.

Sad to say, some reasonably reliable sources now say privately that the rule probably will pass, albeit with several modifications. As we speak, both the SEC and National Association of Securities Dealers are investigating fee-based accounts at major wirehouses for reverse churning, charging a fee on assets for which the broker is providing virtually no service, and double-dipping, charging an ongoing fee on a mutual fund on which the client already paid a substantial commission.

Why the powers that be think this sort of behavior merits an exemption from regulations RIAs must address every day is beyond me. For the SEC to attempt to craft a modification to their exemption that will deal with the problem seems like an exercise in futility, or pushing on a string.

But at least the FPA is on record and has the ear of the national media. So when a new scandal surfaces and it becomes clear that regulators‚ attempts to appease the big boys on Wall Street backfired, they‚ll be able to say, "I told you so."

Evan Simonoff


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