Curiouser And Curiouser

That headline is probably the best description of how the battle over how personal financial advice should be delivered in America in the 21st century is unfolding.


Unfortunately the March 30 decision by a federal appeals court in a lawsuit, brought by the Financial Planning Association, that the Securities and Exchange Commission overstepped its rule-making authority by granting certain brokerages the right to offer investment advice without being saddled with fiduciary responsibility doesn't end the political gamesmanship playing itself out in our nation's capital. Exactly how this battle will be resolved remains uncertain, and advisors shouldn't let themselves be lulled into complacency by FPA's recent success.

But in the marketplace for financial services, which is a lot more rational than Capitol Hill, the advice model is winning big time over the transaction model. All one has to do is look at the price of advice, which has held up surprisingly well in an increasingly competitive environment, and compare it to the cost of transactions, which have tumbled to a few dollars a trade in a much fiercer pricing war.

In what may be a sign of the times, 55 of the 70 advisors in the private client division of Mesirow Financial in Chicago recently became Registered Investment Advisors. While they are retaining their brokerage licenses and crediting their 12b-1 fees against the fees charged to clients, the advice model is gaining momentum partly because regulators are making the transaction model unattractive.

As David Drucker reports in an article on page 93, compliance departments at many of the nation's wirehouses now feel compelled to monitor and approve almost any communication between broker and client; maybe birthday cards are exempted. However, the upshot is that communications, or points of contact, inevitably decline, and brokers and clients feel estranged from each other.

It shouldn't surprise anyone, then, that the exodus from the brokerage world to the RIA space remains strong. Current estimates are that 65,000 people work in RIA firms and that number reportedly is rising a lot faster than the number of firms themselves.

The head of the National Association of Securities Dealers' regulatory arm, Mary Schapiro, is a highly intelligent, experienced professional who understands this, sources say. But the mentality within her agency, like the SEC, ignores changing realities and remains obsessed with policing yesterday's scams.
Over the years, I've heard comical stories about SEC audits and regulatory sweeps. More than one advisor who subscribes to Bob Veres' Inside Information has told me that this subscription has prompted regulators to think they are onto something, but according to my sources, they have yet to find the kind of insider trading they are looking for.

Meanwhile, many think the SEC's new chairman, Christopher Cox, believes his job is to protect the interests of the wirehouses first and the investing public second. Didn't he learn anything from the experience of the humiliated Harvey Pitt?

The SEC has said a report from the RAND Corp., due out in 12 months, will provide it with guidance to recast the regulatory framework within which it sets rules for professionals who work with the investing public. Nothing against the RAND Corp., but I'm not encouraged.

Evan Simonoff