What advisers don’t know can hurt them

Dale BrownOriginally printed in InvestmentNews

Since the financial crisis, the topic of regulatory change has never been far from financial advisers’ minds. Advisers are acutely aware of the challenges posed by the Dodd-Frank Act, money market mutual fund reform and a host of other national regulatory proposals that could affect every advisory practice in the country.

What advisers don’t know, however, can still hurt them. Unless they are paying close attention to new legislative and regulatory proposals at the state level, they may not be aware that some of the most potentially devastating threats confronting their practices are emerging in their own backyards.

Part of our mission at the Financial Services Institute Inc. is to monitor the various state proposals that could affect our members and limit investors’ access to advice.

Below are some of the key issues on which we have successfully engaged state officials this year to protect advisers and their clients, even though advisers may not have known.

Although we were able to defeat or amend each of the bills mentioned here with the help of our members — and change regulation in Florida that cost the typical adviser several thousand dollars — advisers should keep in mind that similar proposals can take shape at any time at the state level, from a broad range of possible sources.

Taxes on financial advice, a bad idea that won’t go away. Many state officials continue to think that new taxes on financial advice, or on transactions such as routine trading and re-balancing activity, would have a negligible effect on investors’ portfolios and returns. Recent proposals in Minnesota and Ohio would have imposed new taxes of 5% or more on financial advice, while also requiring advisers to act as tax collectors for the respective states. Needless to say, these measures would have resulted in significant new costs for advisers — both in dollars and time — while creating new expenses and impediments to sound portfolio management practices for clients.

Eliminating independent-contractor status, jeopardizing objectivity. Independent-contractor status is one of the fundamental underpinnings of our members’ business model, allowing them to provide objective, professional guidance to investors, according to their own best judgment and the clients’ own needs. Unfortunately, this key element of the industry is under constant attack at the state level: A recent measure in Rhode Island would have erased any definition of “independent contractor” and would have forced employers and employees into litigation to determine employment classification status. Similar bills in New York and Washington would have reclassified independent contractors as employees, without exempting our members, and created a presumption of employee status for independent contractors, respectively.

Restricting access to retirement advice, just when Americans need it most. Most observers recognize that huge numbers of Americans are unprepared for retirement and that these investors need more advice and guidance than ever before if we are to avert large-scale hardship among future retirees. You would never know this, however, by looking at several recent state-level bills that would have further limited Americans’ options for obtaining sound retirement planning advice. This year, legislators in Connecticut introduced a pair of bills that would have undermined professional retirement planning providers in the state by automatically enrolling private-sector employees into a public retirement plan. A bill put forward in Illinois, meanwhile, would have limited teachers’ control over their 403(b) retirement savings and restricted their ability to work with an adviser of their own choosing by limiting competition in the state.

Protecting members in the emerging landscape of social media and crowdfunding. Many state legislators and regulators have struggled in recent years to address privacy concerns regarding social media, while allowing broker-dealers to meet their existing compliance requirements. Numerous bills introduced across the country this year sought to restrict employers’ access to employees’ social-media accounts. Although the goal of protecting employees’ privacy is commendable, these bills would have put our firm members in a tough position as they worked to stay compliant with national securities regulations. Without carve-outs for broker-dealers and other firms, these laws would have forced our members to choose between violating state or federal law. At the same time, some states have moved ahead too aggressively to facilitate new crowdfunding practices, without considering the potential ramifications for our industry and investors. A bill proposed this year in North Carolina, for example, would have legalized intrastate crowdfunding ahead of the nationwide implementation of the federal Jumpstart Our Business Startups Act, potentially creating compliance and liability issues for broker-dealers and advisers.

Bringing state registration requirements up-to-date. In the past, financial advisers or firms in Florida were forced to close down their practices, lose revenue and deny their clients access to advice every time they moved across the street, changed broker-dealer affiliation or opened a branch office. With our help, the state recently enacted a law that designated Florida a “notice filing” state and cut the registration processing time from a few weeks to nothing.

The volume of state-level legislative and regulatory threats to independent advisers’ businesses can be dizzying, to say the least. By working together through advocacy groups such as the FSI, firms and advisers can stay up to speed on what is happening in their own statehouses and ensure that our industry — and Main Street American investors — continue to thrive.

Dale E. Brown is president and chief executive of the Financial Services Institute Inc.


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