Comments of Charles D. Meyer on S7-03-03

This document Copyright 2003, by Charles D. Meyer for the purpose of submitting an electronic Response to Proposed Rule: Compliance Programs of Investment Companies and Investment Advisers. SEC File No. S7-03-03. While this document is submitted for publication in the Public Domain, all rights are reserved.

Response to Proposed Rule
Compliance Programs of Investment Companies and Investment Advisers

SEC File No. S7-03-03

Charles D. Meyer, MBA
Meyer Advisory Services
Objective/Comprehensive/Affordable ©1981
"We ONLY Sell Advice" ©1982
204 Main Street
Hampton, NJ 08827
mascdm@earthlink.net

18 April 2003

SUMMARY

PART 1 - Overview

PART 2 - The Paradox of Investor Education and Protection - Within the Context of the Regulatory Framework AND Small Investor NEEDS

PART 3 - The Paradox of Investor Education and Protection - Within the Context of the Regulatory Framework AND Small Adviser SERVICES

PART 4 - Conclusion and Recommendations

SUMMARY

Protecting the consumer does not require more investment adviser laws.
Enforcing the effective existing laws would yield positive results for the consumer.
Eliminating ineffective and detrimental laws would yield positive results to the consumer.
There is no evidence offered to indicate that the Proposed Rules are necessary and/or would yield a positive result to the consumer. The Proposed Rules make very little mention of the consumer or how they would benefit her.
Given the consumer protection track record under the NASD Registered Representative SRO compliance model (where substantial and ongoing consumer abuses are common), it seems illogical to apply it to investment advisers and financial planners (where non-product related financial abuses are not significant or consumer abuses documented).
Existing laws are already regressive and have the effect of making affordable advice unavailable to the small investor and restrict the entry of advisers willing to assist the small investor. More laws will continue to exacerbate this situation.
Uniform federal and state consumer protection laws are necessary across all products (not just securities) for sale to the financial consumer and enforcement jurisdictions and their efforts should be unified.

PART 1 - Overview

I have read the proposed rules and I have no doubt that the motivation behind them is somehow designed with the best of intentions. However, having been an investment adviser who has attempted to cater to the small investor on a fee-only basis for more than 20 years, I fail to see how more regulations will do anything but ADD to my cost of operation and make my services LESS affordable, thereby putting objective help like mine out of the reach of the people who may need and want it most.

My download of the Proposed Rule consisted of 34 pages of text. In light of its size and potential affect on my business and of potentially making it harder for the small investor to find affordable advice, I have chosen to take advantage of an electronic submission of comments to explain in the public record how difficult it is for small fee-only firms to cater to the small investor, and how equally difficult it is for small investors to find them. I have no doubt that if entry barriers were lifted and small investors were made aware that there were many objective and affordable advisers to help them, three things would result:

1) more advisers would begin to enter the market;

2) more small investors would be protected, and;

3) the media might no longer pronounce that fee-only advice is solely available to the rich.

It is clear that the proposed rules would make the Commission's measurable tasks easier and reduce and/or re-allocate demands on staff resources. There is no doubt that it would be lucrative for providers of "compliance services." Certainly an SRO is preferred by service providers who would seek "guild status" and a perceived legitimacy. Would that financial planning (or even investment advice) were so objective and straightforward a process that "one size could fit all." I'm sure I need not remind the Commission that "get rich quick schemes" come and go but legitimate and objectives-based portfolio construction, maintenance, and risk management is more art than science.

For those willing to read my entire submission, I hope you will appreciate how much tenacity was required to deal with such a huge wall of existing arbitrary rules and regulations. I hope that my small success in the face of substantial obstacles will not discourage but rather encourage others to pursue a career designed to help the small investor. I hope small investors might be encouraged to seek those who wish to cater to their needs.

A Fool and Her Money

I caution every investor to thoroughly interview and evaluate the prospective adviser. The best question I can think of to ask a prospective fee-only adviser is why he has chosen to become one. Ask for his Disclosure Document. Perhaps the most important issue is whether her personality is suited to yours. Common advice is to ask for references. I disagree that this is always worthwhile although it doesn't hurt to ask. References can easily be fabricated and legitimate clients may have time constraints or privacy issues that make them reluctant to discuss their affairs with a stranger. The best way to find an adviser is to receive a referral from someone you know, trust, and respect. Choosing someone out of a phone book, industry referral list, cold call to your home or office, or mention by the media are dangerous if you remember that a fool is soon parted from his money, and no amount of regulation can protect a fool.

It should be noted that financial planning is not rocket science. It is something easily learned and performed by the layperson willing to take the time to do the required homework. Many people can do their own plumbing, electrical, and masonry, and some are willing to take the time to do so. Financial planning should be no harder to learn than a building trade. Many advisers (this one included) will offer to point a "do it yourselfer" in the right direction and have periodic meetings along the way. Some of my larger accounts started out that way. This direction may cost $100 to $200 per hour but could be well worth it. How much is YOUR time worth, how much of it do you have available, and how much interest do you have in the process? These answers are an important part of your equation.

Any adviser, no matter how compensated, can be incompetent or simply make a mistake. I see no reason for anyone with normal faculties to enter into any form of discretionary authority unless there are specific reasons of last resort or required convenience. Even a Limited Power of Attorney is a powerful transfer of safeguards against fraud and mismanagement that most people should maintain for themselves, their family, and perhaps a trusted friend.

I Must Take Issue with the Apparent Commission Belief that:

"require(ing) each ...investment adviser registered with the Commission to adopt and implement policies and procedures reasonably designed to prevent violation of the federal securities laws, review those policies and procedures annually for their adequacy and the effectiveness of their implementation, and appoint a chief compliance officer to be responsible for administering the policies and procedures.....(and) other ways to involve the private sector in fostering compliance by investment....advisers with the federal securities laws" will "protect investors by being the first step towards enhanced compliance achieved through private initiative."

There is no evidence that "enhanced compliance" leads to investor protection, although it will almost certainly lead to (better) violation measurement.

More federal laws are likely to precipitate more state laws in order to "close the gap" for those firms purposely exempted from the federal model due to their size or other special characteristics.

Impediments to Effective Investor Protection

My firm has, for over 20 years, been protecting investors through private initiative, and we have found that most IMPEDIMENTS to effective investor protection are the:

1) myriad of federal and state laws already on the books;

2) lack of understanding by investors of investor protection law;

3) marketing and sales practices of financial product providers, and;

4) under-staffing, poor training, and under-financing of legitimate law enforcement agencies already empowered to protect investors from fraud, theft, boiler rooms, and other forms of unscrupulous sales practices.

My early professional efforts to alert appropriate regulators to specific acts of fraud, suspected boiler room activity (specifically First Jersey Securities), churning of client accounts, and fraudulent and unethical sales practices on the part of insurance and securities sales people always fell on deaf ears. My efforts were "front line proof" that the effect of many so-called "investor protection regulations" may not have had the intent but indeed had the effect of protecting the perpetrators rather than the victims.

Suggestions on How to Better Protect the Investor

The Commission's goals and consumer access to the widest range of choice, assistance, and protection would be better served by:

1) making the regulatory environment easier and less costly for firms to help and protect the consumer;

2) incorporating oversight of all financial products and services under one federal agency;

3) adopting plain language;

4) requiring a 12^th grade course in financial planning and money management as a condition of high school graduation;

5) adopting the SEC disclosure model for ALL financial products and services and putting all regulation, oversight, and enforcement under federal (SEC) jurisdiction with state support;

6) implementing a well advertised and universal "911 consumer unit" with both "broadcast" and duplex communication and education programs;

7) imposing significant "punishment fits the crime" financial penalties that would provide restoration of losses to the aggrieved AND punitive damages (where appropriate) directly to the Commission to supplement its operating budget for BOTH investor protection AND education; and

8) insuring a regulatory distinction among firms:

a) and agents licensed to sell products;

b) exclusively dispensing advice but with some form of possession, discretion, or power of attorney over client funds; and

c) firms exclusively dispensing advice but with NO form of possession, discretion, or limited power of attorney over client funds.

While some or all of my suggestions above may seem naïve, out of jurisdiction, impossible, or unreasonable at present, I believe they would have a far greater chance at offering true investor protection than the current Proposal, additional regulations, and/or an SRO.

The Proposal seems to place much more emphasis on policies, procedures, and compliance than it does on consumer remedies. Perhaps this is understandable, since the Commission is only likely to come in contact with the actual financial consumer when some harm has occurred (and only rarely at that). I suspect that the resultant hurdles to entry of advisers wishing to serve the "not yet wealthy" will in effect limit or eliminate consumer protection that is much more likely to benefit the consumer BEFORE harm has occurred.

I submit that there is a potential for synergy between advisers and regulatory enforcement agencies. Advisers have the ability - indeed the fiduciary duty - to be proactive and warn investors BEFORE harm is done. The nature of the regulatory bureaucracy is to be REactive and to limit most TRUE consumer protection to high-profile cases AFTER damage has already occurred. We need only look at Enron as one glaring example of this tragedy of limited - and failed - regulatory resources and of a public led to slaughter.

The Investor's Need for Advice

I believe that the investor is more likely to be better served by a larger and more diverse investment adviser universe than by more regulation of advisers which will likely reduce the universe.

7,790 registered investment advisers is hardly an adequate number of personal watchdogs to help the public sort out the ever-increasing and complex financial choices available to them. Consider that the Commission estimates that merely 172 of these advisers are considered "small entities" by the Commission's own definition. Rather than compile "approved annual aggregate burden estimates" carried to tenths of an hour precision, I suggest the Commission consider how little coverage 172 small entity advisers (managing less than $25 million) can have compared to the number of small to medium net-worth investors likely looking for objective financial assistance.

Consider that most advisers prefer to cater to high net worth clientele. Consider that high net worth clients are much more able to absorb losses than small to medium net-worth investors. Consider that regulatory burdens tend to be higher on smaller firms. Regulatory burdens currently in place therefore have a regressive effect on the financial consumer. Firms like mine, which have developed a niche catering to small investors, are forced to react not only to actual regulations, but to the constant proposals for more -regardless of whether they become law! Imagine the additional insult to me and my prospective clients when hardly a day goes by that the media laments the fact that fee-only financial advice is only available to the wealthy.

172 small entity advisers is certainly an "under the radar" number. By this I mean that many more advisers serving investors with less than $25 million MUST and do exist. In fact recent changes to the Act of 1940 exempted these advisers from registration at the federal level. The effect of this change subjected small advisers to the whims of 50 separate state securities agencies, each with different agendas. While this may have reduced a federal burden on the small advisers, and even encouraged states to ease burdens, it subjected small advisers and small investors to a hodge-podge of regulations, fees, and regulators in an age of extreme investor mobility and multi-state client (re)locations. It dispersed the investor protection scheme rather than focused it. I submit that the effect has been to make it less obvious to the consumer how she is protected and by whom, and much easier for boiler rooms and other unscrupulous operators to prey on the small investor they usually target. (I make these statements while aware of the purpose of the Central Registration Depository.)

PART 2 - The Paradox of Investor Education and Protection - Within the Context of the Regulatory Framework AND Small Investor NEEDS

Why is it that - with all of the media coverage of matters financial - consumers seem more confused than ever with their financial choices and find the adviser providing affordable and objective advice harder to find? 24 hour financial news channels are not much more than a glorified "financial infomercial," - entertaining perhaps - but you better not use the principle of "set it and forget it" with your investments.

The Mutualization of the American Public

Twenty years ago there were barely 500 mutual funds, but they truly catered to the small investor. Today's mutual fund initial account minimums discourage the small investor. Until recently there were 3 times as many mutual funds as stocks in the entire Value Line Investment Survey. The perception that mutual funds are easier that stocks to evaluate and choose is no longer based on the facts. It is possible to buy and hold real stock of companies making real products and selling real services. Instead of costing the investor a percentage of assets owned each year, buying and holding real stocks can be done with small initial investments, few if any fees, and no annual cost. Stocks also often pay dividends. Dividend Reinvestment Programs actually make it easier and more affordable for a small investor to build a portfolio over time which could be diversified and easier to understand. A stock does not have to move up much to be a winner if it can save 3-5% in mutual fund fees and pay 3 - 5% in dividends - year after year.

All of this is academic if one does not understand it. There are probably more people who can explain baseball's Infield Fly Rule than an investment concept as simple as the difference between a stock and a bond (or what a 12(b)1 plan is). This is due to a failure of our secondary educational system and the complexity of "aggressively promoted products." While it supposedly prepares us to earn a living once we graduate, even the college educated are ill-prepared for how to manage the money they earn. We all fall prey to alluring ads for financial products and services, which is for all intents and purposes the only "financial education" most of us will ever get.

The Fragmented and Illogical Regulatory Hodgepodge

The Commission (and most states) has powers to regulate the securities industry, yet many financial products and services fall outside its jurisdiction. Real estate, insurance, banking, taxes, estate planning, mortgages, tangible assets - even some sophisticated financial derivatives - fall outside the Commission's domain. Yet these and other forms of financial services - including credit counseling - fall within the sights of the media blitz designed to separate people from their money. Most of these other financial choices are regulated - usually under state laws - quite often by a tangle of uncoordinated agencies and branches of government within each state. Attempts at Uniform State Securities Law have been ongoing since the 1950s only to fall prey to the "if this is good, I can make it better" mentality of (arguably) well-meaning enforcement attorneys and overzealous politicians eager to accrue campaign war chests under the guise of "getting tough on crime."

Some of the more surreal regulations occur in the insurance industry where, in some states, it is illegal to advise a consumer about an insurance product unless you registered to sell that product. The insurance industry has one of the cozier relationships between regulated and regulator. Typically a consumer is sold an insurance policy on a verbal promise of some benefit accompanied by a contract (which may or may not bear any relationship to the verbal promise) with very small type and many pages to which the consumer has affixed his signature and may never read or understand. Even where state law gives the consumer several days (presumably an estimate of the time required to read the document) during which they may cancel and receive their money back, few people are aware of this feature any more than they are of the commissions incorporated into the product.

I beg the Commission's indulgence in discussing financial products outside of its jurisdiction. I do so because these are very real issues facing the same consumer you are charged to protect. Products and sales agents are competing for the same consumer dollar as the investment companies you do regulate. I have often wondered exactly how many agencies of various levels of government have some niche dedicated to "investor protection" - where investor protection means preventing the consumer from being defrauded and/or sold an inappropriate product (or too much of one).

(At the risk of being incarcerated) I have perhaps "sold" more "umbrella policies" (technically known as Excess Liability Policies) to my clients than most property and casualty agents do in a lifetime. Actually, the agents get the premium, I just recommend the policy. Why? Because the policy is a "good buy" for the client, but the commission payout is too low to justify an aggressive sales pitch for "producers" (their industry term).

Self-Interest, the Push for an Advisory Guild

An adviser doesn't really even manage money, if the money simply flows into mutual funds (he's really just "marking up" the product price). And clients don't even have to be told these "little" details about an adviser operation. Whenever a topic is HOT, you can be sure a consultant will be ready to sell you a way to understand it or do it better. There was a time when "Starting Your Own Mutual Fund" was making the rounds. Really! Many media experts offer advice on getting my name in print. The category of most interest, of course, is how to find and "close" high-net-worth clients. There is no limit to the vendors who stand ready to sell me ways to help me advise clients. Help with my new compliance chores will certainly add ballast to a boat already low in the water.

Twenty years ago mutual fund families begged for adviser business. Fifteen years ago discount brokerage houses wanted it too. For a time they both competed for the business with offers to develop better adviser/client reporting and management support and other inducements to bring in business and gather assets. Today they impose minimums for assets under management, charge fees to both adviser and client for services that were once free, and dictate how an adviser must operate in order to receive investor referrals. Advisers with little account activity, no powers of attorney, and low portfolio turnover are not welcome. The incentives to migrate client assets to these large sales organizations is not necessarily in the best interest of clients - and the client may not even be aware it occurs. Many advisers however, see their becoming a de facto extension of an investment company's sales organization a logical way to profitability and larger account size.

Then there are the real bullies in the pulpit. They have written a book, they are the editor of something or the president of something or the founder or father of something, or a principal of something. They might not actually be the president of the whole organization, perhaps they are the state president, or maybe the president of its local chapter. I've never counted the number of "financial associations" but I bet I'd need more than ten fingers! They fight a lot and come and go. I've lost track of the permutations and combinations of multiple lettered credentials, it's a moving target anyway. These are the would be masters, shop stewards, and local presidents of the hoped-for guild. I've been told over and over that we have to be professionals and to become a professional we need titles, letters, associations, standards, seminars, continuing education, and - above all - an SRO. The logic seems always to be that this is the path to becoming a true profession(al). Limiting entry and protecting the entrants seems to me to be the best way to keep prices high and standardize products and services. This limits the number of people who can afford them and limits creativity, innovation, and choice. I don't see how this benefits the consumer.

Inappropriate Comparisons and Standards

Third party/private compliance review leads to a slippery slope in my view. Professionalism and Practice Standards are common words used to describe the need for compliance review and SROs to oversee them. They don't really speak to "client harm" but to adherence to procedures (which may or may not themselves harm clients). Advisers often like to compare themselves with physicians "treating" clients. Until doctors begin selling drugs or again embrace bloodletting, let's pierce this veil of inappropriate comparisons. With the financial industry dominated by huge product oriented firms, and financial planners still looking for ways to legitimize and promote their services, setting standards and practices in this industry by a private regulatory body such as an SRO could easily lead to the equivalent of legalized bloodletting of the financial consumer and the elimination of potential pioneers in modern financial medicine. Financial planning and fee-only investment advisory services to the "not yet wealthy" are too new a need and field of endeavor to codify and standardize them. Indeed their practices may be so unique to client personality and emerging products and services that they may never lend themselves to easy hierarchical constructs and artificial intelligence. The rich can get one-on-one fee-only advice because they can AFFORD it. Compliance costs and entry restrictions do not matter to the adviser whose market can afford the increase. Perhaps the "not so rich" should be permitted to get one-on-one fee-only advice because they NEED it or WANT it. From a product-oriented perspective, a financial adviser is conditioned to use the "medicines in the bag." From a fee-only perspective, a financial adviser is (or should be) less concerned with "medicines on the market" (or even board-certified surgical procedures) than with client goals and how to achieve them. Client goals may never require products currently on the market or procedures currently "accepted" as "standard." Sometimes clients just need to hear that they are "on course" and doing the right thing. If forced to use the medical analogy, it is my experience that (fee-only) advisers tend to be a hybrid between a research scientist and a family doctor, within the context of an emerging service providing industry. The "pharmaceutical," "procedural," "cognitive," "trade," and indeed "regulatory" disciplines within this industry all have a stake in how this relatively new field of science and technology will sort out and all seem very concerned with their own positioning strategies. My concern is that the patient must have sufficient advocacy in this process and that large trade organizations not be permitted to monopolize the small operators whose practices may adapt and/or incorporate several disciplines.

There are already so many rules on the books that are supposedly helping to protect the public - why is the need for standards and more rules so paramount?

About fifteen years ago, when I was still a member of some of the organizations purporting to represent me and while I was still expecting to benefit from attending seminars, I was a speaker on a panel discussing regulation and the need for (dare I say it) an SRO. A state regulator spoke for the need for more and better regulation, an industry guru spoke for the need for more and better regulation, and a financial journalist did too. As the last to speak, I walked to the podium dragging a large heavy suitcase. I didn't utter a word, instead I started unloading volume after volume after volume of securities regulations and piling them one on top of the next. Laughter broke out in the audience. My only comment was along the lines of: "Why not enforce the effective ones we already have and remove those which don't help the consumer? Why do we need more and who will they help?"

Commissioner Cox and the Letter Writing Campaign

I organized a letter writing campaign to oppose the SRO that was being proposed by the Wirth/Markey Bill. I also wrote individually addressed letters to all Commissioners and Staff Officers. I later found out that for a few days after receiving my letters, everyone in receipt of one was preparing a response to it and it consumed quite a bit of high-priced talent. It also caught the attention of Commissioner Charles Cox. I quote this exchange below:

"From:
Charles D. Meyer
To:
Mr. Charles C. Cox
Commissioner
Securities and Exchange Commission
450 Fifth Street, NW Washington, DC 20549
January 11, 1985
Re: Public Comment on Broker Rules and Request for information and/or assistance with certain state securities laws, in particular: Net Cap and CPA Audit rules.
I am a small independent Registered Investment Adviser...acting primarily as a financial consultant to small businesses and moderate-income individuals who are constrained by time, interest, or knowledge from adequately addressing their own financial planning requirements. In short, most of my clients are so confused by the sales pitches of vendors and the enormous choice of products, that they become targets for sophisticated products about which they understand little and might not need. I devote 40% of my time to researching the financial market place, 40% to client review and discussion, and the balance to administrative tasks. In the industry's terms I am a fee-only financial planner. I have found that my clients' two most asked for areas of help are taxes and investments. Accordingly I became registered with the SEC in 1984 and attempted to conform with state regs as well. At this point allow me to say that the 1940 Act is, in my opinion, an example of excellent government restraint in its attempts at protecting the consumer from illegal practices while not passing judgment as to the background and qualifications of those attempting to provide services to that same consumer.
My attempts at abiding by the law have included applying for IA status in NJ, NY, and PA. I am currently exempt from filing in NY until I have more than 40 clients (this rule seems to consider one innocent until proven guilty and recognizes the limitations of small state clerical and enforcement staffs) but have filed my Form ADV nonetheless. NJ has granted me IA status. PA however has ignored my (statute-prescribed) requests for exemption from certain specific requirements of their statutes. They seem to be denying me due process while effectively prohibiting me from taking on more than 5 investment advisory clients at a time. I think it interesting to note that there are only 165 registered investment advisors in the entire state of PA! The irony that confounds me is that I used to work in Philadelphia and it is in that area where I have been receiving the greatest number of word of mouth referrals from clients, accountants, brokers, and lawyers. PA's actions have been robbing me of time better spent helping my clients.
Today's Wall Street Journal reported that by unanimous vote, the Commission will seek public comment on whether the NetCap and other customer protection rules for brokerage firms should be revised. Apparently the SIA and NASD member firms have asked for the easing of some technical rule. Mention was made of a staff study being released on Monday. It appears that this study only deals with B-D regs.
It was the last paragraph of this article that encouraged me. It stated that the industry is also being asked to comment on "whether firms that don't carry customer accounts should have to meet the same strict liquidity standard as firms that do."
Although I am a member of IAFP and ICFP, these organizations consist mostly of investment brokers and insurance agents. There is no lobby organization for my set of circumstances of which I am aware. I do feel however that the public will be the loser objective, fee-bused advisors to the "little-guy" are kept out of the market.
Please accept this memo as my public comment appealing to the SEC to ease those rules regarding net capital requirements, financial statements, and other administrative burdens that would hinder the entry of fee-only advisors to the marketplace.
I would further like to offer my services to the Commission should they wish to explore these matters further and seek ways to limit the excessive regulatory burden and constraints on entry into the investment advisory market.
While I appreciate that the Commission has no jurisdiction over these matters at the state level, I believe that it might have certain influence. It is my understanding that the NASAA (whose IA committee is chaired by the Secretary of the PA Securities Commission) believes that IA statutes, as they relate to financial advisors, should be "strengthened". I can see only one product of thinking such as this - a toothless law that further exposes the consumer to malpractice, neglect, and fraud. Tougher statutes will only serve to keep the honest advisors out of the moderate-income market. Given the limitations imposed by small staffs, enforcement will be less able to respond to these more stringent regulations and the unscrupulous will continue to prey on their targets.
Please do not misunderstand my motivations. I am well aware of the curious actions of IAFP and ICFP in their support of self-regulation of so-called "financial planners". Since there is no current legal definition of the term "financial planner", thousands wishing to find a new way to peddle a product have used this term for their own gain. I am suggesting that one must FIRST determine the method of compensation BEFORE regulations are drafted for the purpose of protecting the consumer from unscrupulous sales practices. After all, if one sells no securities or products of any type (other than his advice on matters of personal finances), it is impossible to allege sales misconduct. Furthermore if such an advisor specializes in comparing other's products and services as they relate to a particular client's circumstances, isn't it the advisor who is also in a position to protect the consumer from unscrupulous salespeople?
During August 20-25, 1956, the National Conference of Commissioners on Uniform State Laws adopted a Uniform Securities Act. This act was created out of a two-year study of state securities regulation made in consultation with an Advisory Committee containing representatives of the Conference, the American Bar Association, the National Association of Securities Administrators, the SEC, the Investment Bankers Association of America, and the NASD, among others. Much has happened in the financial services industry since then, not the least of which being the PA Securities Act of 1972 which is modeled after the USA but which has added wording with respect to all types of investment advisors such that they have little or no distinction when compared to brokers and dealers. Perhaps it is time to convene another conference.
If you can offer any suggestions to me as to how I might deal with these issues, I would appreciate them. If you know of any staff reports, committees, or studies currently dealing with these matters, I would enjoy an opportunity to contribute.
I thank you in advance for your attention and I need no formal response from your busy schedule unless you can provide some leads as to how I might continue my efforts at conducting my business in both a profitable (unconstrained) and legal (registered/exempt) fashion.
Sincerely,
Charles D. Meyer, MBA, CFP
Registered Investment Adviser
February 5, 1985
Mr. Charles D. Meyer
Dear Mr. Meyer:
Thank you for your letter of January 11, 1985. I think that you made some good points regarding the regulation of financial planners. I especially liked your idea that increased regulation of financial planners poses the danger of raising the costs of planners who cater to moderate income investors until those planners are priced out of the market.
You may be interested in a speech that I gave late last year on the subject of regulating financial planners. I enclose a copy for your information.
Unfortunately, I have no good tips on how you can continue to conduct your business in both a profitable and legal fashion. I would recommend, however, that you continue to inform the state regulators of the burdens that you experience. Also, make your thoughts known to the North American Securities Administrators Association because that organization is currently studying state regulation of financial planners.
Sincerely,
Charles C. Cox
Commissioner
Securities and Exchange Commission
Washington, D.C. 20549"

Considerable media attention was focused on this David and Goliath struggle and most of it highlighted that special interests - not the public - would benefit from the anti-competitive nature of the SRO. I'd like to think I played a part in the defeat of a fairly well-funded lobby so that consumers could have more choice of services offering objectivity, creativity, affordability, education, safety, and peace of mind.

Prevention as a Form of Return on Investment

Most people are conditioned to ask a prospective adviser about their "track record."

I usually rephrase their question as "how can I best help a prospective client?" My reply is "usually by preventing mistakes." After the initial surprise, most people have a eureka moment. They intuitively "get it" even though they have been conditioned by the media to view their problem from a product performance perspective.

The securities business is not structured to prevent client mistakes. If anything, it is structured to cover up mistakes - damage control. Some of the biggest names in the business are actually "convicted felons." Brokerage firms still send monthly statements without basis information or yield calculations. The industry requires an arbitration clause in all account applications. When caught violating industry sales practices, how often is the punishment a short license suspension neither involving an admission nor a denial of fault? If SROs worked so well, why would there be so many published violations requiring such small type to fit them all into the Wall Street Journal's pages?

Insanity Clauses and Other Regulatory Madness

I publish the following as part of my client contract:

"FEDERAL AND STATE REGULATORY NOTICES (with comment in bold)
The U.S. Securities & Exchange Commission requires me to make the following statements:
1. 17 CFR 275.204-3(c)(1) (otherwise known as Paragraph (c)(1) of the Brochure Rule) requires me, annually, and without charge, to offer, in writing, to deliver a written Disclosure Statement.
My "FORM ADV" (disclosure brochure) is always available for your inspection.
I DO NOT accept discretionary authority over or custody of client funds.
To my knowledge, no legal or disciplinary events material to my integrity or ability to meet contractual commitments to my clients have occurred past or present.
2. 17 CFR 275. (unknown authority; re. prepayment).
Please be advised that I DO NOT REQUIRE prepayment of my fees 6 or more months in advance.
The New Jersey Securities Bureau requires me to make the following statements:
1. NJSA 49:3-53(b)(1) requires me to notify you that I "...shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client, except as may be authorized by regulations issued by the bureau chief."
As you know, you pay me a fee for advisory services rendered. Fees are NOT based on performance. I have no affiliation with any product vendors (securities, insurance, banks, mutual funds, etc.)
2. NJSA 49:3-53(b)(2) requires me to notify you, `that no assignment of the contract may be made by the investment adviser without the consent of the other party to the contract'."

These notices always remind me of The Marx Brothers in "A Night at the Opera" with the hilarious bit about a contract with a "sanity clause" when Chico says to Groucho: "You can't fool me, everybody knows there ain't no Sanity Clause." I refer to my Regulatory Notices as "my insanity clauses." Most of my clients have a sense of humor and enjoy the levity.

One year I forgot to enclose a copy of my contract with my renewal application and, sure enough, the NJ Securities Bureau rejected it. And the renewal deadline is right around the time when Old Saint Nick is supposed to be making his rounds.

Another year, the NJ Securities Bureau filed my papers under the wrong name. That year they sent me a letter with an Order to Cease and Desist my activities until I had a valid registration. It took the intervention of my state senator, who happened to be on the appropriations committee, for them to admit their mistake. You got the impression that they didn't make mistakes.

Not long after the Cease and Desist Order, the same senator personally called to alert me to a public hearing on legislation to create an SRO being held the next day in Atlantic City. He advised me that this hearing had come up on short notice and suggested that I get on the agenda and testify, giving me the name and number of the staffer to call. Upon arriving I introduced myself to the staffer as the interested party who had called the day before requesting to testify and took a seat. This was my first experience observing how chummy lobbyists and legislators were with one another and how the real work had already been done behind the scenes with the hearing being merely a formality. Everyone was addressing one another by first names and big smiles. And then the meeting was called for adjournment! I jumped up from my seat and addressed the chairman that I wished to testify. The room fell silent. It was apparent that they didn't know what to do with me and did not want me to speak. The chairman asked me how I had learned of the hearing. When I responded that I had been alerted to it by a senator, he asked for my senator's name, only agreeing to allow my testimony after I gave him the name. My impromptu remarks were based on my observations that the only people who had testified prior to me were representatives of those industries wishing exemption from the law or those who obviously stood to gain from it. I made it quite clear that I was the only person in the room to testify who would be subjected to it and I was not above making a case to the media as to the way this bill was being expedited. After a lot of major whispering among the legislators, I was invited to attend a conference with the lobbyists who had apparently been responsible for helping to draft the bill for the purpose of "working out our differences." When it was obvious that I was unwilling to compromise and willing to make trouble in the media, the sponsor lost interest. My senator later informed me that the sponsor was up for re-election and was probably hoping to use the bill as a way to look good in the press. He seemed amused and impressed with my experience. I had always heard about "back room politics" but it was eye-opening and scary to see it in action.

I once remarked to an enforcement attorney for PA that the regulations seemed to presume guilt rather than innocence. Her response was: "as far as I'm concerned all advisers are crooks."

She might have a point. Many advisers I've met at conferences were there to learn how to be one. They seemed to have the impression that becoming a financial adviser was going to make THEM rich. I didn't realize this was what was meant by "continuing education." I found a similar state of affairs while sitting for exams. During breaks there was always a lot of discussion about when the next study group was meeting or how many times someone had to take Test 3 before finally passing. I always felt glad that they hadn't chosen surgery as a profession.

Once, while waiting to testify at a PA Securities Commission Meeting, I heard one Commissioner comment as part of his recommendation for approving a securities license that "he knew this guy personally and he could sell the Brooklyn Bridge." It warmed my heart to know that this was the Commission whose major role is supporting more and tougher adviser regulations at the North American Securities Administrator's Association, the state securities association and rulemaking authority.

Guarding the Henhouse

I probably have a closer affinity to that of a consumer advocate than of a fiduciary, although I consider myself both. In my role as a consumer advocate, I feel an obligation to report some of my more memorable experiences of finding (primarily state) securities regulations themselves major impediments to investor protection.

I don't find it surprising that so many financial advisers embrace more regulation, since the result usually benefits the advisers more than the investor. What fox wouldn't welcome the opportunity to guard the hen house?

Word of Mouth Referrals and Opportunities

In 1984 Forbes Magazine published a cover story with a picture of a chimpanzee entitled, "These Days Everybody's a Financial Planner." This brought jeers from the financial community who had been doing its best to market its products under the umbrella of financial planning. I immediately secured permission from Forbes to reprint the cover and article, and distributed them as part of my materials for my Common Sense Financial Management courses at the New School for Social Research in New York. My students loved it. I found it interesting to note that most of my students were middle-aged divorced or widowed women. For the most part these people were bright and scared - and not a little embarrassed to have let themselves be in their current state of affairs....clueless and (formerly) totally dependent on their husbands. Yet these students sought out an all day Saturday course limited to 20 attendees and paid tuition rather than attend a free 3-hour seminar with continental breakfast to the first 300 registrants. My students left with a binder full of information on how do "do it themselves" and usually a smile on their face. The purpose of my courses was to educate and demystify.

To my surprise, my syllabus caught the attention of the US Army. They were interested in providing financial counseling services to military personnel. Unlike a traditional company-paid program catering to the officers of the corporation, the Army didn't want me to help the colonels and generals, they wanted me to help the lower pay grades. My seminars had attracted their attention because they had military families having difficulty making ends meet. This was affecting morale and operational readiness. I helped them design a program that provided one-on-one counseling, a written report of recommendations, and sources for self help. It was a very rewarding experience to be in a position to help the truly needy, while the employer footed the bill. At least until the retired military insurance and mutual fund peddlers found out about the program. It had become obvious to me that predatory sales practices were being used on both unsuspecting young officer and enlisted families. Nearly every first question had to do with this particular sales organization which was effectively operating under the informal auspices of the base. I came to find out that this organization existed in (or very close to) nearly every Army base throughout the world in one way or another. It didn't take long for my contract with the Army to be canceled.

I had been working with several other advisers at both the New School and the Army projects in an attempt to find ways of leveraging our individual operations into a more efficient "office" able to adapt itself into a flexible provider of services to medium and large corporations as a means of delivering affordable company-sponsored plans.

Again I was surprised to find my "organization" being interviewed for a program to supply financial counseling and investment advisory services to a major northeast teaching hospital. Ironically our work with very small investors had attracted the attention of a group of high net worth prospective clients. A consultant had been hired to select three finalists for review by the hospital. My firm was one of three organizations which received a formal Request For Proposal with strict guidelines established by the consultant's review of the field of service providers and the needs defined by the hospital (product sales organizations were not allowed to bid as a prime contractor). Using the Army work as a starting point I was able to present a prototype that was received with encouraging first impressions. Unfortunately though, the hospital decided it could not afford to provide the program.

Despite the fact that any financial organization would jump at the chance to provide investment advice to doctors, I have since learned that high-end advice is not perceived as high-end if it doesn't come with a commensurate fee. Recipients of free advice tend to value it as such - especially those with higher incomes and asset bases. The Army personnel were hungry and needy...and VERY appreciative of the opportunity they were given. It is unlikely many of the doctors would have been satisfied or cooperative, no matter what the extent or quality of the service.

It was interesting to note how hard it was to attempt to "partner" with insurance and securities organizations for the implementation phase of our proposal. We had an extremely lucrative opportunity to have hundreds of millions of dollars of assets dumped in our laps, the kind of opportunity a product sales organization only dreams of. Yet not one major national insurance, full or discount brokerage operation, or mutual fund family was interested in working with us (at least not without some quid pro quo). We had to beg local offices to find partners with whom we could design a program. It was also difficult to find fellow fee-only advisers creative enough to take a cooperative role in a big project. Many advisers offered a chance to participate in this project, while in need of the work, declined because they would not be in total control OR because their fixed office overhead did not easily allow them to travel to a locus of tremendous wealth.

[A word of caution to any small (especially fee-only) service provider wishing to enter the company-sponsored financial counseling programs (e.g. 401-K) market. While it may make intuitive sense for an employer to offer advisers with no affiliation to the products utilized by their employee benefit plans, current trends, regulations, and industry lobbying will insure that large insurance and investment companies and computer-based services will "own" this market. I have clients who can receive free counseling as part of their benefits plans who choose to ignore it. Mutual fund families, securities and insurance brokerage, and "electronic brains" will continue to monopolize this market. The "consumers" in this equation will have nothing to say about it. The advice offered to the employees will be "free" to the employer and, of course, be incorporated into the marketing and overhead expenses of the provider. In effect, EVERY person who buys this provider's products will be footing the bill for these "free" employee services or taking their advice from HAL.]

The major time commitment to develop this proposal, the difficulty I had finding willing partners to share in the potential wealth in spite of their need for work, and the constant regulatory impediments, nearly sapped me of my remaining enthusiasm. Fortunately the portfolio management work I had been doing for a few long-term clients was beginning to pay off. Client portfolios were growing at nice rates, and my advice was bearing fruit. I was at a point where my fee structure had begun to be self-sustaining and I would have to find out who valued the advice and who was using it because it was inexpensive.

Twenty Years Later

I am proud to say that today I have portfolios approaching the "magic" $5 million mark that started small nearly 20 years ago.

My clients do not care as much that their 2002 performance outperformed all major averages and mutual funds by a wide margin (which it did) when most declined by 20 - 30%. And they don't expect to outperform some benchmark on an annual basis. My clients are comfortable knowing that they can sleep well at night without worrying about banner headlines of financial mayhem. They appreciate the fact that they have an objectives-based portfolio diversified and dispersed across many individual securities - backed up by the cash for seizing opportunities. They are virtually debt-free and are able to enjoy a lifestyle that has been risk optimized to their comfort level. I do not choose - and have no affiliation with - their brokers, insurance agents, tax preparer, or lawyers. Clients execute their own orders upon my written instructions and receive at least quarterly reports from me, while we both receive statements of all accounts. Progress is tracked and reported, and adjustments made where necessary. Trading is kept to a minimum (which is frustrating for the product salespeople). These are busy people and face-to-face contact is rare, although I make attempts to meet in person annually.

The best fee-only advisers I have met have had a career in financial or strategic planning, education, social work, and/or simply (early) retirement from full-time employment with a portfolio to manage and an interest in helping people. Nearly all are self-employed, entrepreneurial by nature, and work out of their home. Husband and wife teams are not uncommon. The desire to be one's own boss, help people, and balance recreation with work....or equate the two....seems fairly universal. There has rarely been any formal financial services industry experience or licenses in their backgrounds, nor any particular training in sales or office management. Methods and procedures of operation tend to vary from person to person and depend on background, experience, and temperament. These are people to whom the term "creative problem solver" would apply and who thrive on challenge. They began advising others about financial independence ONLY after having accomplishing it for themselves.

PART 3 - The Paradox of Investor Education and Protection - Within the Context of the Regulatory Framework AND Small Adviser SERVICES

My interest in the stock market began when I was a teenager. My father had to co-sign my first brokerage account during the days of fixed commissions. At 13, I was depositing cash from summer jobs. I felt that a 5% savings account was insufficient return on my hard-earned dollars. I remember when the first stock I bought (its symbol was TXO) doubled in short order.

In college I held two part-time jobs and operated a small trading company buying equipment at fire sale prices from departing students in need of cash at the end of semester and reselling at the beginning of the next to students flush with cash. I found this entrepreneurial sideline both lucrative and fun. Interestingly, I found that BOTH the sellers and buyers were happy with their side of these transactions and I certainly enjoyed providing a needed service at a nice profit. I later learned in one of my classes that I had been conducting a form of arbitrage.

After receiving my MBA in 1976, I spent six years in various corporate planning roles at a multi-billion dollar corporation. As a manager I held positions involving econometric forecasting, financial analysis, strategic planning, and multi-billion dollar physical asset management. (I emphasize the word physical to clarify that I was never involved in any form of financial asset management, other than my own.) While employed by this corporation, I began giving financial advice as a sideline business.

Initially my advice took the form of answering unsolicited questions from friends and co-workers. This was during a time of very high taxation, inflation, oil price shocks, and perhaps the beginning of corporate downsizing as we know it today. My company was in the process of shedding tens of thousands of employees, even as they were hiring a few of us MBAs, and people had good reason to worry about their finances.

From 9 to 5 I pushed paper and climbed the corporate ladder and at lunch and after work I would have work sessions with people who were asking me for help. I enjoyed helping them out with their finances and was becoming frustrated at my office dealing with a top-heavy corporate bureaucracy. I had always planned to have a business of my own at some point, but had no specific area in mind.

Within a year of being hired I had purchased a small farm and took out a 10 year mortgage. My goal was to have my mortgage paid off at about the time I felt I might want to go out on my own. My interest in the stock market continued and it was both enjoyable and profitable. Income taxes began to annoy me and I began to spend hours at a law library studying the Internal Revenue Code.

For two consecutive years, my tax return was audited. After both sessions, the IRS Agents agreed I was owed a REFUND plus interest. When co-workers heard these stories I began to be solicited for tax advice. One day someone asked me why I was wasting my time at the company when I could enjoy being paid to help others with their finances.

I had always been interested in research but, other than my little college business, had never been involved in sales. In addition to my own horror stories with sales people, I had listened to a lot of other stories about abusive practices and inappropriate products. I was certain that I would NOT be happy as a stock broker or insurance agent....not that there's anything wrong with them.

Another thing I had noticed in helping others was how hard it was to get objective and affordable advice about an increasingly complex set of financial products and services that may or may not be appropriate....unless one happened to be wealthy. Once again I did research which told me that investment, tax, and retirement planning services tended to be extremely expensive on a fee-for-service basis, and therefore only available to the wealthy. Attempts by large integrated financial services organizations to enter the fee-for-service market had ranged from dismal failure to corporate culture clash, especially when attempting to move "down scale." Even if it was possible for a product-driven industry to be objective and comprehensive on a fee-for-service basis....their corporate bureaucracy carried too much overhead to allow them to market a high quality, custom service at an affordable price. What's more, a "Private Client Group" would not want to cheapen their image by offering downstream services and, at the time, there were plenty of upstream clients to go around. The term "financial planner" was beginning to be mentioned... mostly the way "estate planner" had been used a decade before: to sell or cross-sell product.

I spent several months researching and developing a business plan which created a fee-only financial advisory service catering to the "not yet wealthy" client. The service was designed to evaluate a client's financial problems and goals based on their individual circumstances, evaluate them in the context of their individual budget, risk, tax, investment, and retirement planning, and to make general recommendations on how to tame their financial demons.

My business format was based on low overhead and high volume. I planned to operate as a home-based business, visit clients in their home, rely on word-of-mouth advertising, and make heavy use of the newest technology - the personal computer (in the days when you built them from scratch). Eventually it was my hope that businesses might hear about and want to offer my services to their middle management to complement the high-end services they were already providing to their corporate executives.

I knew there was a market, I knew it wasn't being served, and I knew I could provide it.

My Personal Strategic Planning services were simply an evolution of a process I had been developing and testing on myself and friends and co-workers for nearly 15 years.

It was my belief that if McDonalds could sell billions of hamburgers to the masses, something as basic and necessary as financial advice could be packaged for the masses as well.

And I was right!

While I didn't have insurance policy residuals or a stock broker's book to supply income while I started out, I had established a reserve and taken a severance package that would give me a year or two to get started. I also had a few people who had had signed on before I quit my job.

Early Encouragement - Immediate Response to the Service

Shortly after starting out on my own, several stock brokers who knew me or had heard of my business called me and asked if I would be interested in working with them. This was totally unexpected. It turned out that both saw my concept as a potential complement to their business as opposed to direct competition. Many of their sales inquiries were from small investors who were just starting out and too small to generate trades or justify the broker's time. Yet these brokers did not want to pass up an opportunity to help someone now - hoping that a goodwill referral might generate business in the future. Both Compliance Departments needed to know if I was "Blue-Skyed" in Pennsylvania.

At about the same time, I designed an advertising insert for a regional weekly business journal. This one-page brochure was titled "Financial Planning for the Eighties" and offered objective, comprehensive, and affordable advice to the moderate income client who was constrained by time, interest, or expertise from doing it himself. Our motto was: "We ONLY Sell Advice." I had spent about $1,000 of the advertisement and during the first week I received over 100 requests for more information, many of whom had indicated readiness for a $75 initial consultation and most lived in Pennsylvania, across the river from my home state.

Feeling like the dog who had just caught the car, I realized I needed to obtain a copy of the Blue Sky Law. In a stock broker's world, the Blue Sky Law was just a formality. In my new world as an investment adviser, I was about to learn that it meant 50 different rules for 50 different states. In the case of Pennsylvania, it meant a nightmare of bureaucratic brick walls and ultimately Catch 22.

"The PA Securities Act of 1972, as amended" - when I was finally able to purchase a copy of it - had never envisioned that a service like mine might exist. In fact it made sure that it couldn't possibly exist. To this day I can recall some of its many requirements of any investment adviser with more than 5 clients:

employment in the securities industry for at least two years prior to eligibility to apply;

minimum net capital of $25,000 (without regard to size of client assets or whether any exercise of control existed);

annual audit of financial statements (balance sheet and income statement; of personal assets if sole proprietor);

(Note to regulators: IF I COULD or would run off with client assets, I would take a LOT more than $25,000 with me!)

Series 07 and Series 63 licenses (broker licenses).

These were virtually the same state requirements to open up a major brokerage office. I had no prior employment in the industry. Net capital meant cash or liquid net assets NOT net worth. The cost of an annual audit alone (which had to be conducted by an approved PA CPA firm) was estimated at $5,000 (in 1982). If incorporated, the audit cost, capital requirements, and paperwork were substantially higher. I was not about to make my personal finances a matter of public record unless others in the industry were also required to do so. The only way anyone could take the Series 07 exam was if they were employed by a brokerage firm.

Not only was it impossible for me to satisfy these requirements, to do so would make my services too costly to offer them to my target market. My only hope was to request a permitted exemption from the regulations. This was the one area of the regulations that had no procedure outlined. While the law said they COULD grant an exemption, the staff informed me that they never had and never would. I was quietly told that it would set a precedent they had no intention of allowing.

As far as I was concerned, I had found a state law that violated the Commerce Clause of the US Constitution and bureaucrats who clearly had no interest in the needs of the consumer, yet alone their protection.

The incredible power of unelected state bureaucrats and their staff to write regulations with the force of law was only beginning to become clear.

An attorney friend who practiced in PA offered to represent me pro bono in my request for an exemption from Net Capital and Audited Financial Statement requirements. He felt my only hope was to request a "verbal hearing" by the Commission, which he did on my behalf. Every month he would send a request for a hearing and receive no reply. Apparently any state agency could be compelled to grant a hearing and show "findings of fact" and "issues of law" as to why they took a particular action. Ultimately, when it was obvious we were not going to go away, we prevailed in being granted a hearing. My request for exemption was immediately denied. To this day I have never received "findings of fact" and "issues of law" as to why it was not granted.

My opportunities in Pennsylvania faded away as I attempted to become registered as an investment adviser in Pennsylvania. Ironically, at about the same time, state regulators were conducting media campaigns across the country indicating they were looking for "violators" who were offering investment advice without being registered. At the time, I believe there were fewer than 200 registered investment advisers in Pennsylvania, most of whom were actually brokerage firms operating in the state, employing thousands of brokers who were "Blue Skyed" and therefore not themselves required to register as investment advisers.

Research and the Media

In 1981 I began writing a regular newsletter called "Perspectives ON Planning"©1981. This publication was used as a vehicle to demystify complex financial planning subject matter for the lay person. I researched topics of interest and dedicated each issue to one topic. The newsletter was distributed to clients, a paid subscriber base, as a hand-out at seminars, and to the media. This publication, which ran continuously for over ten years, was a principle delivery method of topical advice in response to a specific need or as a broadcast medium for marketing purposes. It lead to the genesis of feature articles in many national periodicals and invitations for interviews in regional and national radio and television.

The subject of one issue was EE Bonds, written shortly after they had been re-designed to pay an adjustable rate of return with a guaranteed 8.5% minimum rate of return. I jokingly referred to them as being the only investment that was authorized, not sold (yes, the REGULATIONS authorizing them and specifying their sale procedures were "rigorous" to say the least) and suggested they were the closest thing to the "perfect" investment. The Journal of the American Association of Individual Investors reprinted this article and I was swamped by requests for interviews and permission to quote from the publication. I dare say that if I had been an insurance agent with a license to sell this investment for a commission, I would have been the biggest producer in agent history. But then, that was an essential point of my reason for advocating them, why would a commissioned sales agent?

Earlier and before discovering EE Bonds, I had received a call one day from a New York Times writer who had been assigned the topic "The perfect investment." After specifically telling him there was no such thing, he insisted that there must be a "favorite" of mine that I was willing to share. I insisted that only a "mix of investments across many asset types" was a truly "safe" investment and I offered to send him a newsletter I had written in 1983, titled "Investment Choices, Safety, & Risk," which explained why. It turned out that I had sent a complimentary note to his editor and she had specifically requested that I be interviewed for this piece. He gave me his address and agreed to use my publication as a resource. My newsletter included a table showing a matrix of investment types along one axis and BOTH risk and benefit categories along the other. Each intersection point had a number indicating 1-poor, 2-fair, 3-good, and 4-excellent. The narrative explained - and the table illustrated - that no investment type had "good" marks in all categories and many excelling in one category failed in another. Indeed my conclusion was that there was no perfect investment. Several weeks later I received a call from a copy editor at the Times. He was calling to verify that I had been quoted accurately in saying that Coins were the perfect investment! After getting over my shock, I realized that this bozo had added up totals in my rows and columns and concluded that the highest score won......coins! Believe it or not the copy editor and I had a big chuckle of this one and it was fortunate that he had caught this error and the article was pulled from publication. (You can't make up a story like this, trust me.)

Another article I wrote generated a feature piece by US News & World Report. The subject was planning for the family business and a professor from the University of Pennsylvania was also quoted. A talk radio station asked us both to appear on a program to discuss the article. Just before the program was to air, a frenzy of activity began around the studio. The professor and I were clueless. Eventually we found out that a sponsor of the program was an investment company. When they learned that an investment adviser was being interviewed, they DEMANDED equal time on the program. The program was delayed until a land line could be tied into the studio allowing the sponsor to participate in the discussion.

My final horror story about media coverage involves one appearance on television. The subject was, "How to Invest $1,000." This was a long segment but there was a midpoint break to commercials. At this point the hostess - looking quite upset - reminded me that the network had a VERY sophisticated audience and she would appreciate it if I wouldn't try to explain everything. She suggested that it would be better if I just mentioned what stocks to buy. I didn't bother to remind her of the name of her topic and just continued to answer the questions as I felt appropriate. Within a day or so, I began getting calls from the studio forwarding names of people who had called in and wanted more information on my recommendations. For the next several weeks, letters from viewers asking for more information were forwarded to me by the studio. The studio told me in one phone conversation that they never had this much interest in one of their segments. I actually felt bad about a stock broker who actually called me and asked me to tell him what I had recommended on the show. He had a very good client who had watched and he wanted this broker to follow my advice.

I just can't believe that people will see a pundit on the TV, read an article in a magazine or newspaper, or listen to some talk radio program and actually go out and act on it. Even if most of it wasn't tripe, hucksterism, and advertorial tie-ins....do you really want to trust your hard-earned money to "This Old Portfolio?"

Imagine

Imagine if all my efforts at fighting regulatory roadblocks could have been devoted to assisting more clients and alerting receptive regulators to investor abuses!

PART 4 - Conclusion and Recommendations

Protecting the consumer does not require more investment adviser laws.
Enforcing the effective existing laws would yield positive results for the consumer.
Eliminating ineffective and detrimental laws would yield positive results to the consumer.
There is no evidence offered to indicate that the Proposed Rules are necessary and/or would yield a positive result to the consumer. The Proposed Rules make very little mention of the consumer or how they would benefit her.
Given the consumer protection track record under the NASD Registered Representative SRO compliance model (where substantial and ongoing consumer abuses are common), it seems illogical to apply it to investment advisers and financial planners (where non-product related financial abuses are not significant or consumer abuses documented).
Existing laws are already regressive and have the effect of making affordable advice unavailable to the small investor and restrict the entry of advisers willing to assist the small investor. More laws will continue to exacerbate this situation.
Uniform federal and state consumer protection laws are necessary across all products (not just securities) for sale to the financial consumer and enforcement jurisdictions and their efforts should be unified.

If entry barriers were lifted and small investors were made aware that there were many objective and affordable advisers to help them, three things would result:

1) more advisers would begin to enter the market;

2) more small investors would be protected, and;

3) the media might no longer pronounce that fee-only advice is solely available to the rich.

IMPEDIMENTS to effective investor protection are the:

1) myriad of federal and state laws already on the books;

2) lack of understanding by investors of investor protection law;

3) marketing and sales practices of financial product providers, and;

The Commission's goals and consumer access to the widest range of choice, assistance, and protection would be better served by:

1) making the regulatory environment easier and less costly for firms to help and protect the consumer;

2) incorporating oversight of all financial products and services under one federal agency;

3) adopting plain language;

4) requiring a 12^th grade course in financial planning and money management as a condition of high school graduation;

5) adopting the SEC disclosure model for ALL financial products and services and putting all regulation, oversight, and enforcement under federal (SEC) jurisdiction with state support;

6) implementing a well advertised and universal "911 consumer unit" with both "broadcast" and duplex communication and education programs;

8) insuring a regulatory distinction among firms:

a) and agents licensed to sell products;

b) exclusively dispensing advice but with some form of possession, discretion, or power of attorney over client funds; and

c) firms exclusively dispensing advice but with NO form of possession, discretion, or limited power of attorney over client funds.

The Best

The best fee-only advisers I have met, have had a career in financial or strategic planning, education, social work, and/or simply (early) retirement from full-time employment with a portfolio to manage and an interest in helping people. Nearly all are self-employed, entrepreneurial by nature, and work out of their home. Husband and wife teams are not uncommon. The desire to be one's own boss, help people, and balance recreation with work....or equate the two....seems fairly universal. There has rarely been any formal financial services industry experience or licenses in their backgrounds, nor any particular training in sales or office management. Methods and procedures of operation tend to vary from person to person and depend on background, experience, and temperament. These are people to whom the term "creative problem solver" would apply and who thrive on challenge. They began advising others about financial independence ONLY after having accomplishing it for themselves.

The best clients I have met, are mature and have already made mistakes with their money. Usually that's why they have searched for my delivery method. There is something I like about a prospective client who knows how dangerous it is out there. Generally speaking, people who earn a salary or hourly wage have a philosophical problem with paying a fee for advice. It is difficult for them to write a check that might be larger than their rent or mortgage payment. Small business owners and professional people tend to be more receptive to writing the check so long as they don't have an ego problem about taking the advice.

Once a "fit" is found between a prospective client and adviser, there is nothing like the loyalty that can result! They recommend you to their friends. They send you the check within hours of receiving your invoice. Often times the memo line on the check says: "thank you Charlie." Client loyalty and appreciation makes regulatory issues almost tolerable.

Thank You.

Copies:

The Securities and Exchange Commission
The Honorable William H. Donaldson, Chairman
The Honorable Paul S. Atkins, Commissioner
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Harvey J. Goldschmid, Commissioner
The Honorable Raul C. Campos, Commissioner
Giovanni P. Prezioso, General Counsel
Lori A. Richards, Office of Compliance Inspections & Examinations
Paul F. Roye, Director, Division of Investment Management
Stephen M. Cutler, Director, Division of Enforcement

Response to Proposed Rule Compliance Programs of Investment Companies and Investment Advisers

SEC File No. S7-03-03

Response to Proposed Rule
Compliance Programs of Investment Companies and Investment Advisers