Brokers Brace for Transparency Rules; Advisers Build on Existing Model
Of the litany of regulations coming around the bend within the retail investment space, financial advisers said they are most concerned about the fiduciary standard and additional disclosure rules.
That was the sentiment expressed in a new study from Aite Group, "FinReg's Impact on Retail Brokerage and Proprietary Trading," which surveyed 402 financial advisers. The potential impact of financial reform will have far-reaching implications for all faces of the financial services industry, the authors noted.
"The biggest concern is the fiduciary standard," said Douglas Dannemiller, senior analyst and co-author of the report. "That right there will have the biggest impact on retail brokerage."
A key departure from the current fiduciary standard in the brokerage will be more care and loyalty within the client relationship, according to the study. This means that a broker may not be required to monitor and communicate with the retail client regarding the subsequent management of a transaction. Several changes will narrow or perhaps eliminate the already blurry line between investment advisers and brokers, the authors noted.
One likely resolution is that retail brokers will be required to act as fiduciaries with regard to investment advice while at the same time being required to disclose at the point of sale of each instance of traditional brokerage activity such as selling from inventory, offering a proprietary investment product and offering securities from an underwriting client of the firm.
Of the registered investment advisers surveyed, most thought that the fiduciary standard implementation would improve investors' trust in financial firms. Brokers felt that things will remain largely business as usual. Aite noted that RIAs currently operate under a fiduciary standard and the new financial reform regulations would diminish, if not eliminate some areas that impact brokerage firms.
New disclosure requirements are most likely the second greatest concern among advisers, Dannemiller said. The SEC has the authority to issue rules to brokerage firms governing the disclosure of information at the point of sale. The disclosures are required to cover investment objectives, strategies, risks, costs and any compensation or financial incentive received by a broker-dealer in a transaction, according to the study.
"Disclosure is somewhat related to the fiduciary standard. It will have an impact on the way a firm operates from the back office to the front office," Dannemiller said. "Tracking compliance at the point of sale and being able to prove [compliance] may be a pretty significant obstacle."
While many of the responsibilities of the new Consumer Financial Protection Agency fall outside of the scope of financial advice and brokerage, these areas will still be addressed, Aite noted. One of the areas the Financial Industry Regulatory Authority oversees is securities regulation. Aite foresees FINRA may experience competition from the CFPA. At the very least, retail investors will have a new avenue to pursue for recourse when they are unhappy with the financial products and services they receive, the report read.
"It is also well within the realm of possibility for financial adviser registration, examination, and continuing education to fall under the administration of the CFPA. Financial advertising oversight is another strong candidate for CFPA domain because it involves the interaction of retail investment firms with consumers. It is too early to tell how this activity will be coordinated or combined with the current mission of FINRA," Aite wrote.