July 1, 2009
Dear SEC member,
By now you have read the statistics on the overwhelming number of small business that are RIA’s and the accelerating expense ratios as a result of more regulation. This latest recommendation to audit advisors will only put more advisors out of business and direct more investment monies to the larger ‘National’ firms (which I bet offer poorer investment results). I specialize in complexity models and I can tell you the addition of more laws and regulations is not the solution; crime is like water, it flows around obstacles; having the SEC create more obstacles simply damns up the process for the masses who are ethically trying to move down river.
This is the age old question of ‘do guns kill people or do people kill people’; I think it’s the latter. If a firm wants to be compliant it will; if it doesn’t it won’t. How do you know if the additional stress and expenses caused by this new proposal doesn’t actually cause advisors to do more wrong as a result? In Chaos Theory this is a very real outcome. History is chalk full of examples of people being pushed to the brink of their limits. Do you know the breakeven cost of an advisor? Think about it, if you estimate the average bill being $8100 then I know in Seattle it will easily cost me $10000. My average fee is .50 basis points, so I need to raise $2 million in new assets (assuming I had zero cost of marketing, servicing and managing assets) and more realistically $3 million just to cover your proposed expense. Now add in the time and resources it will take me to dedicate to this auditor and my expense more than doubles, and most likely triples. The audit is the easy part, it’s the gathering and organizing of data that is time consuming. So now I’m into your project $20 to $30 thousand dollars and will need to raise $6 to $9 million to offset expenses; again, more pressure on the RIA to make ends meet.
You should read the industry stats; pulling $10 to $30 thousand out of the average RIA will be the final death nail for many RIA’s. End the end, you are only hurting the industry and not helping it and I suspect wrong-doing might actually increase, not decrease. Furthermore, what about those whom are non-compliant? What will be their penalties, extra accounting expenses and solution expenses to fix the problems? What if the auditors requires them to buy an accounting solution for Advent or Portfolio Center? Now their expenses just increased $40,000. Where does it stop?
Social behavior takes many forms, maybe the SEC should hire a behavioral expert to judge the potential reaction of advisors who will be pushed to their psychological limits. It’s a case of ‘careful what you ask for’. I’ve been in the business 25 years and just when you think you’ve seen it all something more preposterous happens. All the governance in the world doesn’t stop the Madoff types; so are you harming more people to protect a few? I suggest you read the ‘Tipping Point’ (again if necessary) if you think this is the solution -
| Bryce James, President – Smart Portfolios, LLC |