As Congress works to compensate the victims of these schemes, it is turning to the SIPC for additional resources. Advisors at large firms already pay a small percentage to fund the insurance the SIPC provides. But the agency’s ability to cover such losses is limited. The extent of the damage exceeds SIPC funds. So where is Congress turning to cover the deficit? Certainly not through the kind of bailout program provided failing banks during the crisis.
Like it or not, new legislation before the Congressional powers is heavily weighted toward viewing RIAs as a next-in-line source. Advisors may have to begin insuring themselves in addition to whatever coverage their firms provide.
Then there’s the client’s side of the picture. With the disappointing returns in traditional markets over the past few years, investors began housing higher returning alternative assets within the tax-deferred haven of their IRAs. IRAs can house partnerships, private REITs, privately held stock, and even operating companies. And each of these alternative types of assets can become havens for illicit dealings. Firms which previously welcomed such assets are now imposing tighter restrictions or sending them elsewhere. Clients may face higher custody fees as specialty firms become the only place of refuge.
Coupled with the added costs which advisors may have to charge to cover added insurance, investors may experience a different type of double-sided cost squeeze. Many advisors are already increasing their management fees as the economy begins to bounce back.
All of this increases the challenge to deliver added value. RIAs typically have been the source for flexibility of service and more customized options for investors. The attraction for entrepreneurial advisors wishing to offer more customized service may be dimming as a result.
Another way to view it is as an opportunity for growth. Sometimes the bigger the challenge, the more difficult it is to see the opportunity. What opportunities do you see as you think about the challenges caused by Madoff, Stanford, new regulatory edicts, and the possibility of mandated fiduciary status?
The hope in asking these questions is to begin a thought process which could open a long and productive discussion. Reinventing an industry is a bit more difficult than reinventing your business. The latter is a choice; the former is not. One by one, there is an opportunity for advisors to make the industry better. In the process, we can find new ways to deliver services that enable investors as well as advisors to meet and beat the challenges before us.


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