May 10, 2013
While I agree that holding the brokerage community to a higher legal and ethical standard as it pertains to interacting with the investing public is needed, I would like to share my concerns with certain aspects of the rule changes being considered by the Commission.
Specifically, I have concerns regarding the attempt to harmonize the rules regulating broker-dealers and investment advisors. On the surface its easy to equate these two business models as they both aim to provide investment advice to the public. In practice, however, the sales relationship between B/Ds and their customers and the fee-only relationship between RIAs and their clients are fundamentally different in almost every way. I believe that trying to regulate these two businesses under one set of rules would be unworkable, place a huge recordkeeping burden on RIAs and ultimately not do anything to protect the investing public.
The resulting burden on RIAs would inevitably arise from the fact that the B/D regulatory regime has far more rules and requirements than RIAs do. Thus, RIAs would bear the brunt of these changes. The additional rules that B/Ds are subject to are necessary because to them investments are products that are sold. The inherent conflicts that come out of this are obvious. No such conflict exists when the client directly pays for the service and that fee is the only revenue to the advisor. The word product is never used at a fee-only firm. Nor is investment suitability ever compromised by having to answer to more than one master.
Effective harmonization can only take place when two things are fundamentally similar. The differences between B/Ds and RIAs business practices and client interactions are so vast that trying to applying one set of rules to both would be like fitting the proverbial round peg in a square hole. Reading through the additional rules and regulations placed on B/Ds it becomes clear that the intent is to address the problems that arise from selling investments. Clearly, this is not an issue with fee-only RIAs.
In my opinion, if the Commission were to create a set of common rules for Broker/Dealers and Registered Investment Advisors, one of two things would happen. The rules for Brokerage firms would weaken as the new standards found a middle ground with the RIA industry or (and far more likely) RIAs would be subject to a wide array of rules and regulations and have to develop policy and procedures covering activities that either never take place or dont pose a risk to the public.
Also, keep in mind that most RIAs are small businesses. Adding to the already meaningful regulatory burden that we live with today will come with substantial costs. This doesnt strike me as something the government should be doing without an obvious benefit– especially in this economy.