May 22, 2009
We are ignorant on your proposal, so apologies in advance.
We have helped clients over the years try to get money back after getting ripped off from aggressive sales practices from insurance companies and brokerage firms. Each time we have written to the SEC and you have never responded... your best asset is the complaints from the public, the press, other advisors, and disgruntled employees. Mark Tidwell, one of the brokers that tipped you off on the Stanford group, was in my study group. If you could keep good lines of communication between advisors that fly straight, we should be able to get the weasels out of the business.
To think you will prevent fraud by going after fee-only advisors (a chronically underpaid group competing with the Dark Side) that debit client accounts in a overly disclosed manner (we have a signed contract with a rate, we send an invoice 4 days prior to debit, the custodians have precautions for debits, loosely at a 3% rate, discloses the fee on monthly statement and on a cumulative basis throughout the year). The few fee-only firms that have gotten in trouble have come from custody issues, general partners, kick backs, or just theft. I have not heard of an fee-only advisor that took out advisory fees in an abusive way. The debiting process is very simple and very transparent. At a brokerage firm, it is almost impossible for you to figure out what is coming out of accounts, thus I saw Merrill Lynch do that frequently.
Our recommendation would be to make life as difficult as you see fit for firms that are aware of conflicts but do them anyway. Said another way, keeping making it difficult, till they stop doing it. This should be a clear sign that your cost of compliance is less than the revenues they get from conflicted practices. Citigroup made loosely 20 billion the year they got totally caught, settlements of only 7 billion allowed them to still be profitable. If someone has custody (Stanford, Maydoff), soft dollars, act as general partner, earn commissions on the side, invest in assets like non-listed REITS that value at $10 regardless of true value, are in referral programs, sell insurance, charge performance fees, sell alternative investments or private equity that are difficult to price... you should be all over them, for is no reason to do dirty business other than the compensation that can occur...