Finl Planning and Investment Advisory

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Aug 16, 2005 2:35 pm

As I'm sure everyone's aware, the SEC has mandated that Financial Planning will become an investment advisory function with compliance date in October 2005.  There's a lot of wrangling going on among firms about how to handle this, (the SIA has asked for a postponement but its being fought hard against) but I thought I'd post some thoughts and get some conversation going.


Here are what I see as the implications. They're my interpretations and if I have something wrong, please say so:



As an investment advisory process, a financial plan will require an investment advisory agreement, signed by the client and the delivery of an ADV form Part 2 (which can be quite the long document.)  The form has to be delivered at the latest when the contracts are signed with a 5 day right to cancel it all. This is onerous...and it is alot of paper.
Once a plan is created, which may include an allocation module, reps are under a fiduciary relationship with their clients. They must adhere to their model, with rebalancing and where a supplementary retirement/insurance/education plan to go with the allocation model may have been nice, it would now be required. Even if you are not insurance licensed, you could be responsible for not creating an insurance plan. Also as fidiciaries, our relationship has changed from salespeople to people required by law to do what's right for the client, to the exclusion of everything else. Determining what is most right, that's not easy and now we can be sued in civil court for violations.
With the financial plan set up as an investment advisory relationship, all plans will not be permitted to be implemented using principal  (including syndicate, underwritings, bonds in inventory, UITs, etc) or cross agency trades. The only exceptions are when the client provides in writing permission and it needs to be obtained in advance and separate notes for each trade.
If you as a rep are not Series 65 or 66 licensed, and your state requires it, you will not be permitted to create a financial plan for your clients, even if they request it. You'll have to refer them to someone else. This, by the way, is most states.
I don't see how any client will not be dis-incentivized from separating the function of creating the financial plan from implementation. Since the trading restrictions are so high, if it were me, as client, I'd do a plan with an investment advisor and take it elsewhere.

Thoughts?  I'm worried that no one will do financial plans for clients anymore!


These are the links if you're interested:


SEC Rule (final with compliance date in Oct 2005):


http://www.sec.gov/rules/final/34-51523.pdf


Arguements about the rule


http://www.sec.gov/rules/petitions/4-507/4507-2.pdf



Aug 21, 2005 5:13 pm

grrr

Aug 30, 2005 4:46 pm

I'm confused by the whole thing.  I just ordered my Series 66
study books and plan on taking the test in October.  I'm wondering
if my firm has to set up an RIA once I get it in order to do financial
plans?  The entire process is getting more confusing.

Aug 30, 2005 5:14 pm
Beagle:

I'm confused by the whole thing.  I just ordered my Series 66 study books and plan on taking the test in October.  I'm wondering if my firm has to set up an RIA once I get it in order to do financial plans?  The entire process is getting more confusing.


The regulators like a complicated process.  It's not about catching the bad guys, it's about having the ability to 'catch' anyone they want because the rules are so complex.  This gives them greater power!

Aug 31, 2005 8:47 am
Beagle:

I'm confused by the whole thing.  I just ordered my Series 66 study books and plan on taking the test in October.  I'm wondering if my firm has to set up an RIA once I get it in order to do financial plans?  The entire process is getting more confusing.


If your b/d does fee-based business then it already is an RIA, and you'll be covered by it as you'll become an Investment Advisor Representative under it once you get your 66.  The question to ask is if they approve of their reps to do financial plans for a fee, if that's what your interest is.  Their ADV for the RIA will spell that out.  (Or just ask them!)

Sep 8, 2005 12:10 pm

That's not the final issue.  Being an IAR (Investment Advisory Rep) is one issue for a lot of states (PA and NY doesn't require it, for example).  The deeper issues are the need for the client to sign the IA agreement (in advance of plan delivery) and then delivering the ADV II.  Then not being able to use primary market, principal trading or cross agency transactions to fulfill the plan's implementation.