August 2, 2010
The impact of the issues surrounding the events of the economic crisis is without dispute. It has affected nearly every person in this country in some way. The causes were many, but I do not recall reading or hearing that the way in which investment advisors were being supervised and the resulting investment advice that they provided were a contributing factor.
While I realize that the environment is to "expand" regulatory controls to avoid such events from reoccurring, this assumes that the current system is broken, for which there is no evidence that that is the case. Were there issues with some individual advisors, undoubtedly. That will remain. Were there individuals who preyed on unwitting individuals, no question. Sadly, those individuals will always exist and will operate "underneath the radar" of whatever regulatory system exists.
What the SEC has not assessed is the impact on the typical investment advisor. The following are for me the key issues. COST - this can be viewed in two ways. One is the cost which for the typical investment advisor is measured in time. If regulatory compliance consumes not 10% but 20% of my time, I have significantly less time to do my main job, that is to provide service and advice to my clients. In the end, it is the individual investor that feels the impact of the "cost of regulation". If I see fewer clients, fees will likely have to increase. The second aspect of cost is the impact of the "retroactive" exposure to both regulatory and private litigation. That exposure creates an operating environment that will be virtually impossible for the typical advisor to operate within, without constant risk of losing their personal financial stability and higher operating costs from increased professional liability premiums. It gives lawyers an entire new "market" for unwarranted and unnecessary litigation.
FAIRNESS - the financial services industry is the most regulated in the country. The additional burden that the proposed regulations place on an investment advisor is unfair for two reasons. One, they assume that current regulations for the typical investment advisor are inadequate. As there is no evidence that they were inadequate, the new regulations can only seem to be viewed as punitive. Second, the retroactive nature of the regulation is unprecedented and creates an excessively burdensome operating environment.
I hope that the SEC can focus its efforts are on the real root causes and not fold under public pressures to create regulation that while intended to help, only hurts the client as well as the advisor.