July 21, 2009
I am an active member of the Financial Planning Association and wanted to comment on the proposed changes to the Custody Rule.
My request would be not to politicize a handful of negative advisors when thousands of investors across the country are receiving a good service provided by ethical Registered Investment Advisors. As you already know, the most effective way of increasing regulation on advisors is not by creating new rules but by enforcing the rules that are already in place.
Bernie Madoff and others like him who have cheated clients out of billions of dollars deserve every minute of sentence that they receive. Creating a rule where advisors have to have a surprise audit does not eliminate the possibility of corruption, though. People who are breaking the existing set of laws will always find new ways to get around a new set of laws – they always have. I think that hiring additional staff to support the SEC in their daunting task of auditing SEC registered firms is the fundamentally best way to protect consumers. This would give the SEC the ability to review firms more often and create a higher enforcement presence in the marketplace that would almost certainly cause ‘iffy’ advisors to think twice about stepping out of line with clients.
I can only imagine that if we have to pay an additional audit fee we will either eliminate a future position in the firm or find a way to pass the cost of the audit to our clients in some form. What would this potentially do? It could send clients to a “cheaper” advisor who is not as good at what they do. Maybe their fees are cheaper because they recommend and sell products to the clients (which we do not do). If clients are running to ‘cheaper’ advisors who also sell products then they are potentially running into a completely different problem – the advisor could be recommending a product due to a commission and not based on the client’s needs. There are probably millions, if not billions, of dollars a year that are paid to insurance and mutual fund companies unnecessarily by advisors putting clients in the wrong product.
If RIAs increase their fee structure in reaction to a new accounting cost, then consumers could potentially waste even more money in unnecessary expenses on unneeded products. I would bet that the unnecessary fees and expenses paid to insurance and mutual fund companies dwarf the loss to investors in the Bernie Madoff case and others like it. However, it is very hard to quantify that number and so it is not ‘politicized’ and threatened with new regulations.
I strongly encourage you not to implement this new rule. I do not think the benefit (mostly political) is better for consumes in the long-run (or even the short-run).
Thank you for your consideration,
William
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
William B. Bissett, CFP®
Pinnacle Advisory Group