Reluctant as we are to call for the establishment of another self-regulatory organization, we have concluded it is the best structure for the regulation of the investment advisory industry.
Reluctant as we are to call for the establishment of another self-regulatory organization, we have concluded it is the best structure for the regulation of the investment advisory industry.
The number of registered investment advisory firms ballooned to 10,484 in 2006, from 7,614 in 2001, and the growth has likely continued. In the same period, the number of brokerage firms declined.
If an SRO is an appropriate mechanism to regulate the brokerage industry, then it is appropriate for the investment advisory industry.
Some will argue that the Securities and Exchange Commission already has the responsibility for monitoring and regulating the investment advisory firms registered with it.
That's correct, but the reality is that the SEC already has too much on its plate, particularly given its inadequate congressional funding. Congress sees far more votes in sending enormous sums to flourishing corn farmers or building highways.
In general, the SEC does a satisfactory job of ferreting out large scandals, but it missed some big ones during the dot-com bubble and failed to pursue the miscreants involved.
It generally does an acceptable job of monitoring and regulating the large mutual fund companies and large advisory firms, but it missed some big problems in the late 1990s until others blew the whistle.
This suggests that the SEC does not have the manpower to identify and pursue every breach of fiduciary duty that occurs at small advisory firms. Savvy bureaucrats recognize that catching one large fish is better for their careers than catching dozens of small ones.
An SRO dedicated to ensuring that federally registered investment advisers of all sizes fulfill their fiduciary duties, and to providing a place for resolution of disagreements between clients and advisers, would ease the load on the SEC and provide more diligent protection for clients.
However, fulfilling that responsibility requires a clear statement of what the fiduciary standards are and how they apply. With those in place, the next step is to have the proper means and manpower to check whether advisers are following those standards.
An SRO for advisers would go a long way toward providing a level playing field between advisers and brokers and, more importantly, might finally put to rest any confusion in the minds of investors over the distinction between advisers and brokers. If that distinction were to become clear, individual investors would be better equipped to make educated decisions about the level of service they preferred.
Those who wanted advice would understand they would get it from advisers. Those who felt capable of making their own investment decisions would deal with brokers and pay only commissions.
A separate SRO might also foster competition between the SROs. Ideally, it would want to be seen as being the toughest guardian of individual investors.
A new SRO would have to be funded by the advisory firms. Ultimately, of course, investors would pay for it. But they would be paying for extra protection.
The SEC should establish a panel made up of advisers, regulators, and representatives of the Denver-based Financial Planning Association and the Washington-based Certified Financial Planner Board of Standards Inc., to flesh out the structure and responsibilities of the new SRO.
