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Three Initial Steps to Tear Down The Industry’s Regulatory Structure

It’s time for a summit between leaders of the broker/dealer and RIA spaces to seriously focus on finding common ground.

A number of years ago, my wife and I considered remodeling our house after living there for two decades. Major changes were needed, but we loved the location and the associated memories.

However, after going through a comprehensive design and planning process to see what could be done, it became obvious that any renovations wouldn't create the outcome we needed. It made much more sense to tear the house down and build an entirely new one in its place. So that's what we did.

This experience can inform the industry's regulatory framework: The regulatory structure we all abide by — including separate regulatory entities and requirements for broker/dealers and RIAs — is based on legislation from a bygone era.

Meanwhile, retail products, market dynamics, technology, demographics and consumer preferences have all transformed. Indeed, financial advisors from 40 years ago dropping into a securities firm today would have almost no way of finding their bearings.

The Department of Labor fiduciary rule, which focuses on advisor compensation and conflicts of interest, is not only a futile effort to renovate part of a hopelessly antiquated structure, but has needlessly pitted the RIA space against b/ds without adding real value to anybody's ability to serve clients.

The fact is, anytime money is exchanged for services the potential for conflict exists. The vast majority of advisors do what is best for their clients, regardless of compensation models — and not just because it's the right thing to do, but because that's the only way to create the relationship-driven, recurring client business necessary to succeed.

So how do we scrap our old regulatory framework and replace it with one consistent structure that drives greater transparency and alignment of interests for everybody, especially the retail investor?

The following are three crucial steps we should take as an industry:

  1. The RIA and broker/dealer spaces should come together in a retail financial advice "summit." Both the b/d and fee-only RIA space share the mission of helping retail investors. As such, we should bring together the leadership of industry associations and industry thought leaders at a retail financial advice "summit" focused on finding common ground in how these different segments of the industry think about what most benefits the end retail investor, and what most directly acts against the retail investor's best interests. The summit's goal should be to develop a core principles document for all advisors, regardless of compensation models, to help guide the discussion on what a future single regulatory framework should look like. 
  2. Focus on compensation structure. The "fees versus commissions" argument has been going on for decades and will only be resolved by regulatory fiat if we continue this way. Instead, once the above-proposed summit produces a unified future regulatory framework for all, the next step should be to find a market-driven advisor compensation system. With comprehensive disclosure requirements, the free market will quickly determine what kinds of fees or commissions make the most sense for end clients, just like most other industry sectors in our economy.  
  3. Build and operate the new regulatory framework on a parallel basis. Fans of real estate and refurbishing programs on numerous cable channels might appreciate this analogy: Like an existing house that cannot be “retrofitted," it might make sense not to attempt to throw out the existing regulatory structure right away, but rather, keep it in place until the new regulatory framework is sufficiently built and then individual firms can migrate over in an orderly fashion while the two parallel structures are operating. All that would be needed are incentives for firms to schedule the move sooner rather than later.

The idea of building an entirely new regulatory structure is daunting. But the alternative — adding more scaffolding and fresh coats of paint on an obsolete building — does not help anybody, least of all retail investors.


Clive Slovin is CEO of The Strategic Financial Alliance, an Atlanta-based independent broker/dealer and RIA firm that is significantly owned by the financial advisors it supports.

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