If I Were King…

As far as my friends could tell, the only difference was this: The banks could tell customers, with a perfectly straight face, under oath and with the ability to pass a lie detector test, that none of their reps were receiving sales commissions.

The banks were, in fact if not in spirit, fee-only. The impact of the commission ban was to allow sales organizations to gain more trust from their unwary customers.

Instead of telling brokerage firms and broker-dealers that their reps were no longer allowed to get paid to sell particular products, I would require those reps to identify themselves as sales agents. That is, if the rep was employed by a company that was registered with FINRA, that rep would have to call him/herself a registered sales agent or sales broker.

On the other side, if the company was registered with the SEC, then all client investment/insurance recommendations would fall under a fiduciary standard, and the advisor would be required to sign a fiduciary declaration that would be given to each client at least annually. (More paperwork? Hey, take it up with my ministers.)

Meanwhile, the SEC would tremble at my coronation – and for good reason. The chief regulator of the financial services world is long overdue for a major restructuring, and I would start on that within the first hour of my reign. The SEC’s regulatory protection, under my rule, would mostly consist of comparing customer account balances at the custodian with the performance statements generated by the advisory firm’s investment management software. This would be done automatically through data feeds and matching algorithms. Client confidentiality would be preserved by the data feeds obscuring the names and other personal information of the client, and simply compare the balances and performance of account numbers.

But… what if an advisor is sending a different performance statement to clients than the one generated by the software? What if Bernie Madoff were to break out of prison and start manufacturing statements that were sent by snail mail to gullible clients?

My check and balance there would be to randomly connect with one or two clients for every 100 or 200 that the advisor served, and ask that client to check the balances on the performance statement with the balances at the custodian, and provide verification.

Meanwhile, the SEC could verify that the RIA firm is complying with cybersecurity protocols by sending a pfishing message or two to some or all the firm’s staff members and have a couple of professional hackers in the home office try to penetrate the outer perimeter of its cyber defenses. It could ask for a PDF copy of the compliance and cybersecurity manuals and ask ChatGPT to summarize them. Finally, the regulators would use smart software to scan the websites of each RIA firm to check for overpromising language, and to compare the claims of returns and AUM with the statements.

All these things, plus a check of trading activity on behalf of staff accounts, could be done automatically. This virtually eliminates the need for site visits, and unless something sketchy shows up in the automated checks, the SEC and the states would not be sending out auditors to sit in the office for days at a time. Because of this, I would bring all the advisory firms that are regulated by the states back under SEC supervision, freeing up state resources to follow up on prosecuting criminal activity in their areas of responsibility.

What do we do with all those now-superfluous SEC auditors? As king, I would direct the SEC to perform thorough reviews of the sales practices of those firms that still have FINRA licenses. That’s where all the conflicts of interest remain in the financial services world. That’s where there are greed-related incentives to churn customer accounts, recommend unsuitable investments, fleece the elderly and replace insurance and annuity contracts just to generate another commission. That’s where companies manufacture financial products and then tell their reps to sell them.

I would have these SEC representatives look extra carefully at the construction of those products. If a brokerage firm creates an investment “opportunity” that is virtually guaranteed to fail so that its best customers can bet against it, and then sells that investment “opportunity” to unwary consumers for high commissions, I want the SEC to know about it before that product hits the streets.

The usual argument for allowing the brokerage firms to operate as they do has always been that they foster “capital formation,” basically meaning that they sell IPOs. In my first week on the throne, I would take that business entirely out of their hands and have all IPO auctions facilitated on the web, perhaps by creating a government-sanctioned version of GoFundMe. No longer would brokerage firms take 7% of the money raised out of the hides of the company’s principals; no longer would they underprice the new shares to get a big “pop” on the opening day. We buy pretty much everything else on the web these days, including (increasingly) insurance coverage and investments. There is no logical reason why IPO shares should be any different.

I would also command FINRA to change its name back to what it was; 'Financial Industry Regulatory Authority' makes it sound like they actually regulate the entire 'financial industry.' Better yet, I'd tell them that their new name is the National Association of Professional Securities Sales Agents (NAPSSA).

That about covers my first week in office. At this point, I would be looking around for what else to do. And my royal gaze would fall on the way the financial planning profession is regulated.

Or, I should say, not regulated. Yes (I hear the cries of protest from my increasingly restive loyal subjects), you do indeed have to register the firm, undergo intrusive SEC audits (I fixed that last week) and follow a lot of rules. But all of that is regulation of your investment activities, not your financial planning work.

The first thing I would do is separate planning from investing. If you offer flat-fee or hourly planning and don’t manage portfolios, if you recommend generic portfolio allocations using ETFs that the client would purchase him/herself, then I would decree that you don’t have to register with the SEC at all. (You would still have to sign that fiduciary oath.)

I would decree that financial planners, individually, would be overseen by a self-regulatory organization specific to financial planning, which would have state branches/organizations like the accounting profession currently does. The individual planners would register with the SRO branch in their state, which would confer registration with the national organization.

After this edict has been announced by my town criers around the country, I expect a huge uprising among the folk who run financial planning firms, calling for a royal decapitation. But before you roll out the guillotine, let me explain. First, for financial planning to become a real, regulated profession like medicine, law or accounting, there would have to be a government-sanctioned regulatory body that acts as an overseer and guarantor of the ethics and services of the planning firms. There is no other option; you just can’t have a profession where somebody like me (a benevolent but financially incompetent monarch) can call himself a financial planner.

The devil is in the fine print of my edicts. The SRO would restrict competition by requiring every member (remember, I envision individual planners being members, not the companies they work for) to have a recognized credential which can only be obtained through recognized educational training. My royal mind is open to suggestions here, but I think the CFP and the AICPA PFS are shoo-ins for this required credential, and we can debate whether expanded CFA training would be included. It has reached my royal ears that CFA exams now include, as optional areas, a lot of financial planning material.

Some might argue that attorneys and banking professionals should be allowed in under the SRO umbrella, but my heart is hardened against this suggestion. You would need financial planning training to be licensed as a financial planner. I so decree it.

Some might argue that this regulator would intrusively micro-manage the advice that clients receive, or stifle creativity in how advisors provide their services. But that doesn’t have to be the case. I don’t think attorneys or doctors feel the hot breath of regulatory scrutiny at their necks during their routine work on behalf of clients or patients. Why should an SRO for planners be any different?

What would it cost to be part of the SRO? I don’t know; we would create a workable budget. But some firms could repurpose their SEC fees toward this new SRO. In fact, the SRO would also regulate the investment activities of its members, using the same methodology that I decreed for the SEC, and the SEC would be free to use its newly liberated resources to crawl all over the brokerage sales organizations.

Would my new SRO be an expanded CFP Board? I wish it could, but my royal sense is that this wouldn’t work. The CFP Board has gone too far down the road of arguing that the CFP is the only possible credential for financial planners, and its enforcement record is (I’m being kind here) spotty.

Unfortunately, my realm stops at the borders of the financial services industry, so I don’t have the power to take other actions that would facilitate a better business environment for advisory firms and their clients. But I would strongly recommend that colleges move their financial planning programs into a separate financial planning department, and normalize the degrees they provide to something like a bachelor of science (or arts?) in financial planning. Colleges are notoriously slow to evolve, so I might have to send in troops.

I also wouldn’t have the power to require that every high school in the country create an elective course in financial planning, which might become a core part of the normal curriculum at some point down the road. I remember taking a useless “problems of democracy” elective in my senior year of high school (there were no business classes available), so I know that there is room for another elective. My lieges would be ineffective at making this happen, but I might decree a stipend from my royal treasury. The SRO might be a funding source.

After that, I would plan to do essentially what the new King of England will be doing: hanging around the throne with my feet propped up on a convenient desk, hearing petitions from the commoners at my leisure, and drawing an income which I guarantee would be lower than British citizens are paying for similar services in London.

As Ruhlin did so well back in the day, my goal in this whimsical exercise is to illustrate how far we are from an ideal world, and how much work and how many years will have to be endured before this profession gets to a point where the regulation is truly protective and yet light on the touch, where financial planning achieves true professional status, where the public gets a clear choice between a sales agent or a credentialed professional.

As far as I know, there isn’t a popular movement to put a crown on my head (I’m open to the idea). But by laying out my royal agenda. I’m providing a realistic path from where we are to where many of us hope to someday find ourselves.

What do you think?

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

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