Activity of Investment Advice Needs Regulation

As Congress prepares to tighten financial regulation to correct weaknesses revealed by the mortgage collapse, the debate over who should regulate those who give in-vestment advice, including financial planners, has entered a new phase.
In the latest development, as reported in InvestmentNews last week, the Washington-based Certified Financial Planner Board of Standards Inc., the Denver-based Financial Planning Association and the Arlington Heights, Ill.-based National Association of Professional Financial Advisors, have formed the Financial Planning Coalition to help shape regulatory-reform legislation.

The groups want to dissuade Congress and the Securities and Exchange Commission from putting financial planning activities, as distinct from investment advisory activities, under the regulatory oversight of the Financial Industry Regulatory Authority Inc. of New York and Washington, which now regulates brokers. The coalition wants to place the supervision of financial planning activities under the CFP Board, acting as a professional regulatory organization, much in the way bar associations govern the activities of attorneys.

We know the debate over financial regulatory reform will become more heated when congressional hearings on the issue begin. And the fine points of adviser versus planner regulation could too easily be pushed into the background as various parties try to protect their turf.

If we can put politics aside, however, all stakeholders involved in this debate, especially members of Congress, should keep in mind the single most important question: What is best for investors?

We believe the best solution for assuring that investors receive sound advice is for a new regulatory organization to be created to oversee anyone offering financial planning advice and for Finra to oversee anyone giving investment advice, whether that person is a financial planner, investment adviser or -broker.

One could argue that a separate regulatory authority for planners and advisers overseeing both planning and investment advice would be the simplest and best solution. After all, planners and advisers are on the same page regarding fiduciary responsibility. But granting the CFP Board such authority poses problems. The board does not have Finra's level of staffing. Monitoring almost 60,000 certified financial planners and the estimated 300,000 others who call themselves planners and provide investment advice (and currently are regulated directly by the SEC) would stretch resources beyond current capacity. The board would have to build the necessary staff from scratch, and some means of paying that staff would have to be determined.

The Financial Planning Coalition should focus on gaining self-regulatory authority to set and enforce standards for anyone offering, or purporting to offer, financial planning advice.

It also should work to ensure that reform legislation requires that anyone who gives investment advice be held to a fiduciary standard.

On the investment side, there is a strong case to be made for taking oversight of investment advisory activities away from direct supervision of the overburdened SEC. It failed to detect Bernard Madoff's $50 billion Ponzi scheme even though the agency was tipped off to something fishy almost a decade earlier. Likewise, several other fraudulent schemes have come to light recently that the SEC failed to detect.

As for Finra, the agency is the logical body to assume responsibility for regulating investment advisers and the investment advice activities of financial planners because it has an existing enforcement structure and staff to implement and monitor its regulations.

It is not the perfect candidate, however. Finra's experience largely has involved regulating commission-related brokerage activities and enforcing a suitability standard. If given the regulatory authority over the investment advice of planners and advisers, Finra would have to step up examiner training to detect breaches of fiduciary responsibility. It also would have to add investment advisers to its board to provide the necessary insights. And it would have to make a commitment to changing its broker- oriented culture.

Under any new regulatory scheme covering investment advice, however, one principle must remain crystal clear: Any provider of investment advice, even a broker giving advice incidental to a transaction, must be held to a fiduciary standard.