Politics weighs on economy

Over the last year, federal regulators have struggled to implement the Dodd-Frank financial reform law, Republican lawmakers and the Obama administration have clashed over the federal budget, and Congress came dangerously close to allowing a default on U.S. debt obligations. The turmoil in the capital — and its impact on the economy and markets — has changed adviser-client conversations. “We never in our lives have had to talk about politics as much as we do now,” said John Ritter, co-owner of Ritter Daniher Financial Advisory LLC, which has $200 million under management. Vijay Marolia, chief investment officer at Private Wealth Management LLC, which advises on $240 million, is seeing the same trend. “Politics has never been as big a worry for our clients as it is today,” Mr. Marolia said. When advisers and clients discuss what's happening in Washington, it tends to be an outlet for venting about political gridlock. “What we're sensing from our clients is an overall disgust with both sides of the aisle,” Mr. Ritter said. That sentiment also is prevalent among advisers, according to the 2011 InvestmentNews Industry Attitudes survey. More than three-quarters, 75.2%, believe that the Obama administration is doing a “poor” job dealing with the economy. Congress fared worse, with 88.4% rating its performance as “poor.” If the electorate were limited to advisers, Mr. Obama would be in trouble in 2012. In the survey, 75.6% of the respondents said they would not vote to re-elect the president. “Until we get leadership on a political level, we are going to continue to wallow in this muck,” said Harley Lance Kaplan, managing principal of Beta Industries Inc. in Sherborn, Mass. “There is a total frustration with government now among clients, and a total bewilderment about why they're not getting the job done, why they're not putting the country first.” The increased focus on politics means that advisers have to do more than evaluate the market. They also have to keep up with developments in Washington. Mr. Marolia said that he has had to add new sources to his research material to track legislative and regulatory news. His reading list tends to involve as much political science as finance. “Today, it's a huge factor in managing money,” Mr. Marolia said. “It's forcing me to pay attention to things I did not go to school to learn about.” As advisers survey the Washington landscape, they zero in on the implementation of the massive Dodd-Frank measure. A year ago, advisers identified “regulatory overload” as one of their biggest concerns. Even though most of the Dodd-Frank rules have yet to be promulgated, advisers fret about how the law will change their practices. Trepidation about the way Dodd-Frank will unfold adds to the “economic uncertainty” that advisers this year said is the biggest impediment to their firms' growth.

FEAR OF THE UNKNOWN

“It's one more bit of uncertainty in an uncertain world,” Mr. Ritter said. “We know that [Dodd-Frank] is going to have some kind of effect, but we don't know what that effect will do.” It likely will be a while before advisers will feel the full impact of Dodd-Frank. The law gives the Securities and Exchange Commission the authority to issue a rule imposing a universal fiduciary duty on retail investment advice and harmonize regulations between advisers and brokers. But the SEC will not propose such a regulation until next year. In addition, Dodd-Frank required the SEC to assess how to increase oversight of investment advice. The agency examines only about 9% of advisers annually. In a report to Congress, the SEC recommended that it be allowed to impose user fees for exams. It also suggested that a self-regulatory organization be established for advisers or that the reach of the Financial Industry Regulatory Authority Inc. be expanded to include oversight of advisers dually registered as brokers. Congress has to approve any of the options. Last month, House Financial Services Committee Chairman Spencer Bachus, R-Ala., proposed draft legislation that would authorize one or more adviser SROs. Among advisers surveyed by InvestmentNews, a sizable plurality — 47.4% — favor the SEC's imposing on brokers the same fiduciary standard that advisers must meet (29.8% prefer to keep the status quo, and 23% want a new standard of care for everyone). Among those who favor this approach, 65.3% are fee-only advisers, 41.6% charge fees and commissions, and 28.6% are commission-only. About 30% of those surveyed want to see the SEC maintain the status quo on standard of care. Among those of this opinion, 42.9% are commission-only brokers. Another 23% of the total survey said that the SEC should develop a brand-new standard of care for everyone. Commission-only brokers make up 30.4% of that group. A similar split was evident on the question of who should regulate advisers. Among respondents, 41.8% said the SEC should regulate large advisers and states small advisers, while 31.2% said Finra should take over. Among those who favor SEC and state regulation, 65.4% are fee-only advisers. About three-quarters of those favoring Finra are advisers who charge a commission for at least part of their revenue. Mr. Kaplan is wary of Dodd-Frank, claiming it is biased against brokers. “They think all these brokers are trying to take advantage of their clients,” he said. “Any broker with good ethics places the interest of his clients ahead of his own. If you don't make clients happy, they take their assets and go elsewhere.”

FEAR OF FINRA

Mr. Ritter wants the SEC to retain oversight of the advice sector. He fears that Finra, which enforces the less stringent suitability standard for brokers, would “water down” the fiduciary standard. The commission repeatedly has said that it will establish a separate SRO that reflects the adviser business. “We don't believe [Finra] truly understands the adviser community,” Mr. Ritter said. “They would orchestrate a race to the bottom rather than a race to the top.” Regardless of the details of regulation, Mr. Kaplan said that Washington is doing too much of it. “We're overburdened with compliance issues,” he said. mschoeff@investmentnews.com