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This is the latest installment of a new, regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
The overlords of clickbait said I need to make this a highly partisan article to maximize readership.
But my answer to this question is the same with Biden or Trump. Let me explain.
With a new administration underway, you might be asking yourself if the president will:
- Increase or decrease regulations on the financial services industry?
- Revisit the “DOL rule”?
- Adjust Regulation Best Interest?
- Look to steer the SEC in a new direction?
- Establish a more uniform fiduciary standard?
These questions could have been asked of Biden or Trump.
As I divine the future, or, for those old enough to remember, I gaze into my Magic 8-Ball, my answer to these questions is decidedly… I do not know!
Hold please, let me check it again. It turns out… No one knows!
While there is room for plenty of commentary on these questions, no one (not even the president himself) knows yet what will ultimately come of any such endeavors. With an inevitable (toxic?) mix of politics, lobbying efforts, and national priorities, no one can foresee what will come to fruition.
With no prophetic wisdom from the Magic 8-ball, whatever regulatory changes come later, everyone affected will be tasked with implementing them into their specific business models. The question is… will that be easier or harder for RIAs?
I will plant my flag and argue that any regulatory changes to come will always be easier to implement in an advisor-friendly way by smaller, independent RIAs.
For example, the SEC recently began implementing new advertising rules for Registered Investment Advisors. This includes the large “corporate RIA” you might be affiliated under.
The new rule making now allows for testimonials under certain conditions.
Each firm needs to implement specific compliance policies to ensure those conditions are satisfied and demonstrate that conformity after the fact. Those policies might involve varying approval parameters, documentation requirements, etc.
Now ask yourself…where might this be implemented in such a way that it is most accommodating to advisors? A firm with 10,000+ advisors that must implement a policy to corral a wide-ranging and large population of advisors? Or a smaller RIA with only a few dozen or fewer advisors?
If you are the chief compliance officer of the large firm, and with your job on the line if you screw things up, you might implement some robust new testimonial approval system, which must be strictly adhered to. Perhaps a system requiring that each advisor access the system within X days of desiring to use a testimonial, provide documentation demonstrating how they satisfied each of the X different conditions of the rule, await for X compliance teams to approve or not, document the X different places that the testimonial is ultimately used, etc.
The CCO will not risk losing their job over a few bad apples, even if it means inconveniencing most of its advisors now wrapped up in an arguably arduous review and approval system.
Compare that to how you might implement such a process within your own RIA. Perhaps you are comfortable demonstrating the required steps via a simple notation in your compliance files. Make the notation, move on.
This is a perfect example of the lowest common denominator approach to compliance. The aforementioned CCO might be the most pro-advisor CCO on the planet. They are nonetheless tasked with implementing policies to keep an enormous population of advisors aligned to the new regulatory requirement.
It is simple math. Which structure will be more accommodative to advisors? A system to address 10,000+ advisors? Or a system to address perhaps only a handful of advisors?
None of us know what regulatory changes are yet to come. Perhaps some areas of focus are more likely than others, but no one knows for sure.
No matter what regulatory changes come to pass, if you had to pick between being part of an enormously large team of advisors or a selectively targeted smaller team, which do you think can adapt in the most advisor-friendly manner?
Waiting to see what steps the Biden administration takes before making a move to the RIA model is no more logical than waiting for the market to go up before investing. Position yourself as best as possible and adjust to the regulatory landscape as it changes.
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.
Read more articles by Brad Wales
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
