Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the ongoing industry drama of the prospective “Schwabitrade” merger, with a new public “Pledge” from Schwab that it will accept all RIAs regardless of AUM and without any custody fees, buzz that Fidelity will soon require a larger subset of least-profitable RIAs to begin paying a platform custody fee, and Pershing rethinking its prior $250M AUM custody minimum as it too positions to capture potential “NeverSchwab” RIAs that have been rejected by Schwab in the past when they were small and may not want to return from TD Ameritrade to Schwab in the prospective merger.
Also in the Schwabitrade news this week is the fresh revelation from a recent Schwab mid-quarter Business Update to Wall Street that, for the sake of acquisition expediency, they will not likely retain TD Ameritrade’s popular (and most open architecture) VEO platform and instead anticipate keeping their own Schwab systems at the core, simply augmenting them with TD Ameritrade technology as it deems appropriate, amidst the latest buzz of what’s worrying the advisor community as the Schwabitrade deal continues to ripple (beyond just RIAs themselves on the TD Ameritrade platform, and the broader potential impact to the entire advisor technology ecosystem).
From there, we have several articles on industry regulation, including some pushback from advisor industry associations about the SEC’s proposed relaxing of the RIA advertising rules as being a welcome change but one that may put too much compliance burdens all at once on RIAs (as virtually all client communication may be scooped up as being ‘advertising’ under the new rules), a newly approved model regulation from the NAIC on a “best interests” standard for annuity agents that in practice simply repeats FINRA’s existing non-fiduciary suitability requirements, positive progress on NASAA’s recent model rule to prevent financial exploitation of seniors (making it easier and safer for advisors to intervene on their clients’ behalf), and a new proposal from NASAA to potentially require all advisors under an RIA to obtain 12 hours per year of continuing education credits.
We wrap up with three interesting articles, all around the theme of trying to clean up the advisor industry: the first highlights how lobbying firms representing Wall Street brokerage firms and insurance and investment products continue to drastically outstrip the spending of actual financial advisor advocacy organizations like the IAA, FPA, and NAPFA; the second looks at the emerging regulatory challenge of ‘fake comment letters’ that create the impression of widespread support or opposition for proposed regulation but in reality are simply fake spam (and may have played a role in the DoL fiduciary rule); and the last is a frustrating profile of an “advisor” who has repeatedly been barred and fined (by both an individual state and then nationally by the SEC), and even convicted of a felony for securities fraud, with an obligation to pay more than $4M in restitution that hasn’t been repaid, yet still continues to maintain a state insurance license for the past several years, and holds out to the public as a financial advisor providing retirement income plans to clients to facilitate annuity sales… begging the question of when the various regulators that oversee financial advisors will finally ever get better about coordinating to ensure that bad actors already convicted repeatedly under one regulator don’t simply set up shop again as “financial advisors” under a different regulator and continue doing potentially-problematic business with consumers?
Enjoy the ‘light’ reading!
Schwab “Pledges” To Play Nice With Smaller RIAs (Jeff Benjamin, Investment News) – When the news first broke that Schwab was aiming to acquire TD Ameritrade, a palpable fear emerged amongst ‘smaller’ (<$50M AUM) RIAs on the TD Ameritrade platforms, many of whom had joined TDA specifically because they were rejected by, couldn’t get access to, or had their fees raised by Schwab’s RIA custodial platform in the first place… wondering whether Schwab would once again enact minimums or raise fees that would kick those small RIAs off the platform (again). Responding to the ongoing criticism and fears, Schwab this week published an outright “Pledge To The Independent Advisor Community“, committing to offer custody services with no AUM minimums and no custody fees (albeit with a somewhat open-ended “no intention to raise them”) and to maintain a more open-architecture environment with a “rapidly growing network of third-party providers”, top-level service with “the best and the brightest service professionals”, practice management support, and more reinvestments into their digital account-opening process. In fact, Schwab noted that already over half of their advisory firms have less than $100M of AUM and that it built its custodial RIA platform with such ‘smaller’ firms (back when there weren’t any large RIAs in the first place!). Strategically, Schwab’s very public pledge appears to be both an attempt to minimize attrition in the TD Ameritrade deal as competitors try to pull away nervous “never-Schwab” RIAs – with an announced industry advertising blitz to highlight the 5-point pledge coming soon – and to stave off concerns from the Department of Justice about whether the proposed merger would overly concentrate the options for small RIAs.
Fidelity Investments Will Broaden RIA Custody Fees Starting In July (Lisa Shidler, RIABiz) – This week, Fidelity informed 293 advisory firms that they will be required to begin paying a per-account or firm-level custody fee starting in July… or agree to have their clients’ cash accounts swept into proprietary Fidelity money market funds (on which Fidelity collects a 42-basis-point fee) or its FDIC-insured cash product FCASH. Notably, though, while Fidelity is emphasizing that only a “small number” of advisory firms will be affected, Fidelity has declined to indicate what types of advisory firms are being impacted… suggesting that the phenomenon may be more wide-spread than just a few of the smallest RIAs on their platform. After all, it’s arguably the larger RIA firms that tend to have fully implemented rebalancing software to manage their portfolio models… and either minimize cash holdings or trade out of the custodian’s proprietary money market funds together. Still, though, the announcement is an about-face from less than 6 months ago when Fidelity boasted about the greater flexibility it was providing to RIAs regarding their cash options as a benefit of using the Fidelity platform and is already leading to a burgeoning backlash against the platform from RIAs that resent being ‘forced’ as fiduciaries to invest client assets into specified Fidelity proprietary funds or to “suffer consequences“. Yet the reality is that the leading alternative – going to Schwab – would simply force clients to be defaulted into Schwab’s low-yielding cash sweep without even the choice that Fidelity provides to select a higher-yielding alternative. Nonetheless, confronting RIAs with the pricing choice to ‘pay the fee, or let your clients fund the advisor’s expenses via Fidelity’s proprietary products’ is creating an uncomfortable fiduciary tension for RIAs wondering if such a conflicted choice would have to be outright disclosed to all clients in Form ADV in the first place, especially as Schwab put forth its own pledge this week that it has ‘no intention to enacting custody fees’. On the other hand, arguably opening the door to an RIA custody fee could eventually create the option for Fidelity to move away from its commission-based RIA custodian structure altogether, and instead adopt a “fee-only” RIA custody model to support the fee-only RIAs it serves?
Pershing Rethinks Minimums To Attract ‘Never Schwabers’ (Samuel Steinberger, Wealth Management) – With the ongoing angst over the prospective “Schwabitrade” merger, competing RIA custodian Pershing Advisor Solutions has announced that it will no longer commit to its $250M AUM minimum to work with the platform, and instead is willing to work with a wider range of RIAs regardless of their assets under management. Notably, though, Pershing is still explicitly focused on “professionally managed, growth-oriented firms” that have a “high potential for future growth and a history of success”, and firms must be willing to make the internal investments to learn Pershing’s systems and commit their new business to the custodian. At the same time, Pershing is pledging to make further investments into its technology infrastructure, where ‘just’ 38% of accounts last year were able to be opened digitally (i.e., without using a piece of paper), though Pershing has stated it aims to make itself an increasingly open-architecture advisor-tech ecosystem similar to TD Ameritrade’s popular VEO platform. Ultimately, it’s not clear that Pershing will be able to attract a significant portion of the existing TD Ameritrade advisor base, as their ‘ideal profile’ in terms of growth-oriented professionally-managed firms (e.g., firms that hire COOs and/or move their founders out of advisor roles into solely management roles) means Pershing still has a fairly narrow and specific focus on the type of RIA it aims to serve. Nonetheless, as Pershing itself notes, there are a subset of RIAs that might be dubbed “Never Schwabers” who will choose anywhere but… putting at least some RIAs in play that might be a fit for Pershing’s particular approach.
Schwab Execs All But Dash RIA Hopes For TD Ameritrade VEO Survival (Oisin Breen, RIABiz) – In a recent “Winter Business Update” to Wall Street, Schwab COO Joe Martinetto stated that as the prospective Schwabitrade integration looms, in any scenario where it’s a binary choice between TD and Schwab systems, that “Schwab’s are vastly preferred” and that “except where there’s a clear material advantage in what the TD approach brings… our going-in presumption is we’re starting from the Schwab platform”. Or stated more simply, it appears increasingly likely that TD Ameritrade’s VEO open architecture system is likely to be scrapped for Schwab’s existing (and much less open) system after the merger closes. Which in turn is setting off rippling concerns across TD Ameritrade RIAs, both because it’s not clear which technology systems those RIAs use will get included/added to Schwab’s integration roadmap (as any migration to new Schwab-mandated systems may incur a substantial migration cost — will that be the obligation of the RIAs to pay for Schwab’s decision to retire VEO and force the migration of their data?), and because many RIAs chose TD Ameritrade specifically because of the opportunities for ongoing access to new technology as it first comes to market (given that most FinTech startups integrated first and foremost to TDA’s open architecture system). Notably, though, it’s still entirely possible and even likely that Schwab will adopt at least the most popular integration partners of VEO, both to minimize disruption to existing RIAs and because almost by definition any integrations that are so popular amongst (TD’s) RIAs would likely be additive in the Schwab ecosystem as well. However, with Martinetto emphasizing that “this can’t be a system-by-system, platform-by-platform, pick-the-best and drive to an optimized platform over the long run… will just take too long”, the indication is still that (as predicted) TD Ameritrade’s advisors will be forced to leave VEO for Schwab’s systems if only for Schwab’s expediency… with subsequent integrations of existing TD Ameritrade tools and integrations to the Schwab system ‘to be determined’ in the future (and/or the potential that Schwab spins off VEO altogether)? Which is not only potentially very disruptive for TD Ameritrade’s RIAs… but also raises substantial questions about future innovation of advisor technology when startups no longer have an open architecture path to the RIA marketplace with Schwab as they once did with TD Ameritrade?
3 Big Advisor Worries About Schwab-TD Ameritrade Deal (Jeff Berman, ThinkAdvisor) – At the recent TD Ameritrade LINC National Conference, the buzz of the advisor community was on the prospective “Schwabitrade” merger, with TD Ameritrade leadership speaking from the platform to try to soothe nerves and allay concerns (and emphasize that until the deal closes, it is “business as normal” anyway). Still, though, advisory firms with a long-term relationship-oriented focus are already focusing on what the future may hold, and contingency plans if the deal is ultimately consummated. Advisor tech guru Joel Bruckenstein noted that, not surprisingly, one of the biggest concerns being expressed on the ground by TD Ameritrade advisors is the potential future of its open-architecture VEO platform, and whether what TDA firms believe is superior technology will be ‘taken away’ from them after the deal closes – potentially a very substantial disruption for RIAs on the TDA platform, not only due to the forced need to learn Schwab’s systems instead, but also the danger that key technology the firm currently uses via VEO might not have an integration future with Schwab’s more closed system. Also of concern is the level of service that smaller RIAs will receive at Schwab versus their existing relationship at TD Ameritrade, especially for firms that in the past were denied service by Schwab altogether (due to Schwab’s prior asset minimums). Though arguably, the greatest concern is the potential culture clash between Schwab and TD Ameritrade, where TDA has long had the reputation for a more entrepreneurial “we’re #2, we try harder” Avis-style approach to Schwab’s Hertz… and whether Schwab’s hire of former TDA RIA custody chief Tom Bradley will be able to sustain that TDA culture in the Schwab ecosystem.
Adviser Trade Associations Tell SEC To Rework Proposal To Modernize Advertising Rule (Mark Schoeff Jr., Investment News) – Last November, the SEC released a proposed revamp of the rules governing RIA advertising that would (finally) allow advisory firms to post testimonials and clear the way for third-party advisor rating systems, along with permitting RIAs to use (limited) investment performance results in their advertising. As Public Comment letters have come in, industry feedback is largely positive for the SEC adopting a more flexible and principles-based approach to the advertising framework that should be able to better adapt in the future (as contrasted with the existing more-rules-based framework that hadn’t been updated since 1961!)… with the caveat from the Investment Adviser Association that the SEC’s new approach may be too expansive and cause virtually any and all communication with clients to be treated as ‘advertising’ (with all the pre- and/or post-review compliance oversight that would then have to accompany it). Similarly, the Financial Planning Association also raised the concern that the SEC’s new rule could force a substantial amount of new compliance obligations on RIAs all at once (given the breadth of additional types of communication that must be overseen under the new framework), as did NAPFA (which also noted that in practice only larger RIAs may be able to afford to advertise under the new regulations, putting smaller RIAs at a competitive disadvantage). Though the Institute for the Fiduciary Standard suggested that in the end, the best way to avoid RIAs unduly ‘puffing’ themselves up too much with potentially biased testimonials is for the SEC to stick with its original rule framework and continue to ban testimonials and endorsements altogether.
State Regulators Approve Best-Interest Standard For Annuity Sales (Mark Schoeff Jr., Investment News) – This week, the National Association of Insurance Commissioners (NAIC) approved a new model regulation that would require insurance professionals to act in their customers’ best interests when selling annuities. Notably, though, the newly proposed model rule does not appear to be a full fiduciary rule – as many states themselves have been recently proposing – and instead merely requires that salespeople are simply expected to “manage” (but not necessarily avoid) their material conflicts of interest, that clients sign a disclosure document acknowledging what the insurance agent is selling and the agent’s conflicted compensation, and dubbing the rule itself the “Suitability in Annuity Transactions Model Regulation” (effectively conforming itself to the non-fiduciary Suitability obligations of broker-dealers). Accordingly, the Center for Economic Justice is already objecting to the final model regulation, suggesting that it will simply allow insurance producers to claim that they are acting in a consumer’s “best interests” when they don’t actually have any legal obligation to do so. In the end, though, the NAIC’s model regulation is ultimately just that – a “model” regulation – and it is still up to the states to actually pass legislation, one state at a time, to implement the rule. Which raises the question of whether states actually will adopt the NAIC’s non-fiduciary model regulation for annuity sales, or continue with the existing trend of writing their own state-level full fiduciary rules instead?
NASAA Says Model Law Is Working To Fight Senior Financial Abuse (Investment News) – Back in 2016, NASAA finalized a Model Rule to protect vulnerable (e.g., elderly or disabled) adults from financial exploitation, and began rolling out training to financial services firms on how to comply with the new rule. The key aspect of the new rule was a means for brokers and investment advisers to gain ‘qualified immunity’ for delaying disbursements from a client’s account in situations of suspected financial exploitation, and protecting the advisor from potentially being liable for breaching client confidentiality by contacting authorities in cases of suspected financial exploitation. Now 3 years later, 25 states have enacted the model legislation, and NASAA reports that 426 reports from broker-dealers and investment advisers have already come in and helped to shed light on victims of securities fraud and elder financial exploitation, leading to 81 investigations, 32 formal enforcement actions, and 57 instances where disbursements of a client’s funds were able to be delayed after being flagged as suspicious. In the meantime, NASAA continues to push for more states to enact the model legislation, as part of an ongoing regulatory focus to engage the financial advisor community to have more and better tools to aid clients in situations of diminishing mental capacity and concerns about financial exploitation.
NASAA Proposes CE Requirements For Investment Adviser Reps (Melanie Waddell, ThinkAdvisor) – The North American Securities Administrators Association (NASAA) this week put forth a new plan that would require Investment Adviser Representatives of RIAs to earn 12 hours of continuing education per year, including 6 hours on “Products and Practice” (to ensure ongoing knowledge and competency in products, strategies, etc.), and another 6 hours on “Ethics and Professional Responsibility” (i.e., regarding the IAR’s duties and obligations to clients). Fortunately, the NASAA proposal does stipulate that CE credits completed for other credentialing organizations can qualify, at least for credentials that otherwise qualify for a waiver of the Series 65 exam in the first place (e.g., CFP certificants, CFA charterholders, CPA/PFS designees, and those with the ChFC). The proposal comes after a 2017 survey of state regulators that supported the proposal, and a 2018 industry-focused survey to explore the feasibility of the IAR CE initiative. Now a formally proposed rule, NASAA has indicated that it will take Public Comments through March 30th, with commentators anticipating the new rule to take effect in 2021 or 2022.
Brokerage Groups Spend More On Lobbying Than Adviser Organizations (Mark Schoeff Jr., Investment News) – Industry expenditures on lobbying are required to be publicly disclosed by law… and reveal that the brokerage industry spends substantially more on lobbying for (favorable) regulation than organizations representing financial advisors. For instance, last year SIFMA (representing Wall Street brokerage firms) spent $6.6M, the Investment Company Institute (representing mutual fund products) spend $4.9M, the American Council of Life Insurers spent $4M, the National Association of Insurance and Financial Advisors (representing life insurance agents) spent $2.4M, and the Financial Services Institute (representing independent broker-dealers) spent $480,000. By contrast, the Investment Adviser Association spent only $220,000 last year, and the Financial Planning Association spent less than $50,000 (with its lobbying group often spending less than $5,000/quarter engaged in lobbying advocacy efforts for the FPA). Last year, the primary focus of lobbying efforts was on getting the SECURE Act passed, along with efforts to oppose a potential 0.1% excise tax on financial transactions.
Comment ‘Pawns’ Helped Kill DoL Fiduciary Rule? (Allison Bell, ThinkAdvisor) – Last week, the House Financial Services oversight committee held a hearing on the integrity of public comments in regulatory rulemaking, noting the emergence of ‘astroturfing’ where organizations create a large volume of fake public comment letters supporting or opposing a proposed rule when in reality that grassroots support or opposition doesn’t actually exist in the first place and is simply representing the industry’s own interests. While the astroturfing challenge has been a problem in a number of recent high-profile rulemaking processes (e.g., the recent regulation on Net Neutrality), the committee specifically noted that astroturfing played a role in the Department of Labor’s fiduciary rule as well, where one business group claimed to have located several dozen businesses claiming that implementation of the DoL fiduciary rule would lead to a loss of their trusted financial advisors but in reality the business owners cited were either brokers themselves, didn’t answer the phone, or hadn’t actually made the comments or weren’t even still actively working with their financial advisor (raising the question of whether the Fiduciary Rule might have gotten through more quickly and survived legal challenge if astroturfed anti-fiduciary comments hadn’t been given such weight?). Unfortunately, though, with artificial intelligence able to not just submit a massive volume of fake public comment letters, but even ‘write’ the letters differently to avoid having them be obviously identical, regulators are still struggling with how to handle the issue, with proposals including potentially fighting AI with AI (e.g., using AI to scan through public comments, try to identify fake ones, or at least surface common themes and trends across a large volume of public comments so the quantity alone don’t receive undue weight), or creating a system similar to the UK’s “Evidence Check” approach that crowdsources reviews of comments and evidence to ensure the valid comments are seen and the fake astroturfed ones are flagged appropriately.
Convicted Felon Barred Twice From Selling Securities Still Clings To Insurance License (Bruce Kelly, Investment News) – One of the fundamental challenges of the current regulatory framework for financial advisors is that they are not actually regulated as advisors, per se, but instead are regulated based on the products they sell or solutions they implement with clients. As a result, it’s possible that an advisor can run afoul of one regulator but continue in the business as a bad actor by simply switching to another advisor product channel instead. For instance, Kelly highlights one broker who was barred from selling investments in Maryland in 2006 (and forced to pay restitution for harm caused to clients), and then again by the SEC nationwide in 2016 (for selling a fraudulent stock offering to 130 clients and forced to repay $3.5M in restitution), while also having a felony conviction in Kansas for securities fraud and related issues (again forced to repay almost $850,000 in restitution)… and despite still not having paid all the restitution for his prior crimes, still maintains a state insurance license in Maryland while holding out to the public as having over 20 years of experience and providing retirement income plans to clients while highlighting his affiliation to Ed Slott’s Elite IRA Advisor Group. And while Maryland did attempt to revoke the agent’s license last October, his appeal of the order (with hearings still ongoing) has allowed him to continue to hold out as an insurance and annuity agent in “good standing” with the state. Which ultimately raises the question: What does it take for an “advisor” or salesperson to lose his/her license to sell insurance products to consumers? (Or prevent them from receiving such a license in the first place after already being repeatedly convicted of selling fraudulent non-insurance investment products to consumers?)
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors as well.