There’s a huge story erupting in the industry this week as the man who was supposed to defend the investment advisory community from conflicted brokerage SRO oversight has decided to fall on his own sword rather than wield it.
The cliffs notes version of what happened (I’ll have links below) is the following:
Part of Dodd-Frank involved a discussion about how the fastest growing channel within the investment business, fee-only advisors, should be regulated. The SEC lacks the resources to see all of the new firms that have been sprouting up as advisors leave the wirehouses and brokerages to hang their own shingle. The regulatory model most advisors would prefer to see involves the SEC getting additional government funding and, combined with state oversight for smaller firms, this would keep things as they are – copacetic.
But the self regulatory organization (SRO) of the brokerage industry, Finra, sees that the end is near for traditional brokerage and is making a power grab. Brokerage firms and the brokers they employ have been dropping like flies. Membership is down and both the practitioners, their clients and the assets are voting with their feet – fleeing the transactional commission-based model for the more holistic fiduciary RIA firms.
Finra needs to get oversight of this channel in order to have a raison d’etre in the future. And the advisory community would rather eat glass – would rather drink poison – than submit to the regulator of broker-dealers; “two totally incompatible worlds” is the common refrain.
Ron Rhoades is the firebrand advocate at the forefront of the fiduciary model, he tweets anti-Finra and anti-brokerage rhetoric like a man possessed from his @140Limited Twitter handle. I named Rhoades to my 25 most dangerous people in financial media list. He was set to be the incoming chairman of NAPFA (Nat’l Assoc of Personal Financial Advisors). He’s been extremely vocal about defeating the Spencer Bachus-sponsored bill that would put Finra atop the advisory biz. “The gloves are coming off,” he would say and it became the battle cry of thousands of advisory small business owners who are determined not to let the entrenched interests of Wall Street interfere with their independent model.
Rhoades was to begin his chairmanship of NAPFA on September 1st. And then all of a sudden, last night he sent a letter out declining the post. The investment industry and media watchers were stunned. His reason stemmed from a paperwork filing technicality that found him temporarily in violation of Florida state regulation (he had 11 clients in the state, above the maximum of 5 clients without being registered and thought he had more time to file). To have this minor, nonsensical infraction keep him from leading the industry is inexplicable to virtually everyone. It would be like a President-Elect of the United States turning down the inauguration because of a parking ticket.
But Ron Rhoades is apparently a man of deep principle. With this incredible act of selflessness, he is showing the industry and its regulators how seriously he takes regulation and that he intends to practice what he preaches. He is denying the enemies of his movement an opportunity to use his minor mistake as a cudgel with which to beat investment advisors into submission. Industry people I’ve spoken with off the record are absolutely beside themselves. They don’t know what to say, other than that they are extraordinarily disappointed. They wonder what Finra, the SEC and Bachus think about this shocking development, they wonder what this will mean for the overall battle.
We shall see very soon, I suspect.