Tom Orecchio has some bones to pick.
Tom Orecchio has some bones to pick. A recent study by Rand Corp. of Santa Monica, Calif., on investment advisers and broker-dealers didn't ask the right questions, according to Mr. Orecchio, chairman of the Arlington Heights, Ill.-based National Association of Personal Financial Advisors. And he questions the idea of a self-regulatory organization for financial advisers.
As for the controversial 12(b)-1 marketing and sales fees paid by mutual fund investors, Mr. Orecchio doesn't think it passes the smell test. A continuing payment to a broker, he argues, "sounds an awful lot like an ongoing cost for ongoing services."
And if that is indeed the case, Mr. Orecchio maintains, investment advisers need to register and be held to a fiduciary standard.
Mr. Orecchio, principal and vice president of Greenbaum & Orecchio Inc. of Old Tappan, N.J., also plans to join the fight against proposed sales taxes on advisory services in Florida and Georgia.
And as NAPFA prepares to celebrate its 25th anniversary when it convenes its annual conference in Long Beach, Calif., in May, he said the fee-only business model is doing just fine.
"It clearly works as a business and service delivery model," Mr. Orecchio said. "As a business model, it means we can make a living doing it; as a service delivery model, it removes conflicts so that individuals get what I'll call compensation-conflict-free advice."
Q. NAPFA was very critical of the Rand report on investment advisers and broker-dealers in a letter to Securities and Exchange Commission Chairman Christopher Cox in January. What are your biggest objections to the report?
A. Our biggest objections to the Rand report are mostly about the fact that it left out some critical questions.
One of those questions was: How does the public feel about the different service models, the way in which they receive information from their advisers? If asked properly, the response they would have gotten is that the public is concerned about conflicts of interest. But because it was left out completely, there wasn't any information in the Rand report about how to clean up the conflicts of interest that exist in our industry.
The Rand report was very limited in scope and only asked the questions: What business practices exist now, and what is the consumer understanding of these business practices? As we said in the letter, we believe the right question to ask is: How can existing laws be applied to best ensure a positive financial future for America?
Q. Were you surprised that the report found confusion in the public's mind between advisers and broker-dealers?
A. No, not at all. In fact, we expected that. The report was a validation of our belief that confusion exists and that recent action by the SEC only adds to the confusion. There is no bright-line test between being a registered investment adviser and acting as a fiduciary, and being a broker or a registered representative and being held to a suitability standard, and that to us is problematic.
Q. What is your position on having a self-regulatory organization for investment advisers?
A. I think there are pros and cons to self- regulatory organizations. I think it could work well, but the problem is, in some cases, it's the fox watching the henhouse. If it's not done clearly, with checks and balances, there's too much room for conflicts.
Q. Such as?
A. We would be regulating ourselves. That in itself is a conflict.
Q. Do you agree with the Financial Planning Association, which objects to an SRO but is interested in exploring a "professional regulatory organization"?
A. I think that has a lot of merit. I think the [Denver-based] FPA has lot of the same objections as we do about an SRO. Removing an SRO as an option might remove some of the conflicts that exist when you have an SRO.
Q. Is NAPFA talking to the FPA about this issue?
A. NAPFA has an industry issues committee, and there are members on that committee, that are members of the FPA and run in those same circles. So yes, we have reached out to them in that respect, but there have not been formal discussions.
Q. Do you expect any formal discussions in the future?
A. We would hope so.
Q. What will happen regarding the Rand report or the SRO issue this year?
A. I'm not so sure that much is going to happen this year with regard to the Rand report other than the three months that they're proposing to come up with some recommendations. We're in an election year, there are a lot of things in flux, and there are a lot of different parts of the industry calling for changes. I think the SEC is going to need to digest a lot of this information before they have a clear path or direction they'd like to go in.
Q. What is NAPFA's position on the 12(b)-1 fee issue?
A. We think that 12(b)-1 fees have been used for the wrong purpose.
Q. Can you explain that?
A. The purpose of 12(b)-1 fees in the past was as a marketing expense that funds needed to charge their investors so they could market the product and get it to economies of scale to reduce their overall costs. Large funds are still charging the fees, and they are not being used for marketing purposes but instead are being paid to brokers to continue to service their clients.
Now if there's an ongoing payment to a broker, to us that sounds an awful lot like an ongoing cost for ongoing services. That's one of the criteria that exists for registering as an investment adviser and being held to a fiduciary standard. So we don't think it's being used for its original purpose, and we have a problem with that.
Q. Do you agree with the SEC that there should be a cap on the fees?
A. I'm not so sure about a cap. I think when used for the right purpose, the fee works, but it's not being used for the right purpose. I think if we get back to what a 12(b)-1 fee is for, we should use it for that purpose. If it's being used for something else, and they want to continue using it for that other purpose, we need to change the name and change the rules.
Q. Do any NAPFA members receive 12(b)-1 fees?
A. No NAPFA members are permitted to receive 12(b)-1 fees, because it is compensation tied to a product.
Q. Is NAPFA taking any action regarding new proposals to tax advisers in Florida and Georgia?
A. Yes, that's something we're considering at the industry issues committee level. Most recently, we had this issue in Michigan, and we took a very proactive stance, as did the FPA, in helping to get that removed. We supported letter-writing campaigns and actions by local planners in Michigan, and we would hope that other states would learn from what happened in Michigan.
Here's our problem with this: Government has said time and again that people should be more dependent on their own abilities, and President Bush has called for an "ownership society." Yet these states are looking to tax financial advice. Well, if you want Americans to be more financially independent and less dependent on government-subsidy-type programs, wouldn't it make sense to provide incentives for individuals to be able to save and invest prudently for themselves? Why would you be taxing the independent advice that fosters that model?
Q. Have you talked to the FPA about combined actions in Florida and Georgia?
A. I need to talk to people on our industry issues committee to see what the FPA is doing in this area. But clearly, we both have the same interests here, and I think we're stronger together than we are apart.
Q. NAPFA will have its annual conference in May. What do you see as some of the biggest grass-roots planning issues going into the conference?
A. Clearly, there's a need for competent credentialed individuals in our industry. There's a talent shortage, and the largest generation of clients, the baby boomers, are getting ready to retire.
We need to get this conflict-free advice down to Middle America. There's been some movement there, and we think there's a democratization of our services, and that's a good thing. Right now, there's this idea of life cycle savings and investing, where you go out and accumulate as much as you can and go out and get the highest rate of return.
But what that doesn't guarantee you, because of the risks of the market, is that there will be enough money there to keep you in your standard of living.
E-mail Charles Paikert at cpaikert@investmentnews.com
