Advisers will have their hands full with the reform law

The Dodd-Frank financial-reform bill has been signed into law by President Barack Obama, for better or worse. Financial planners and investment advisers will have their work cut out for them determining what the 2,300 pages of the legislation — and likely thousands of pages of regulations to follow — will mean for their clients and their profession. The prospect is that financial advisers of all stripes immediately will have to do a great deal of homework analyzing the law's impact on each of their clients and continue studying every new regulation as it is issued by the Securities and Exchange Commission and the new Bureau of Consumer Financial Protection, among others. One thing that broker-dealer-connected advisers won't have to worry about — at least not right away — is adhering to the fiduciary standard that registered investment advisers must employ in giving advice. That is because the law pushes the issue onto the SEC to study and comment on during the next six months. As reported in InvestmentNews last week, some experts think that the SEC will delegate the task of fiduciary oversight to the Financial Industry Regulatory Authority Inc. Advisers will, however, have to worry about the possible impact of the reforms on mutual funds, the preferred investment vehicle for many investors. The law could affect mutual fund investors in several ways. For example, its tighter rules on derivatives might impose new expenses on mutual funds by increasing the costs of derivatives trades — or perhaps cut returns by reducing investors' use of derivatives for timely positioning in the market or hedging positions in uncertain times. In recommending funds, advisers will have to pay close attention to determine what impact, if any, the rules will have on those funds and to see if other, similar funds are affected in the same way. The law also calls for the comptroller general to study mutual fund advertising, in particular the inclusion of past performance. If use of such historical data is banned, advisers' lives could get easier because they won't have to resist pressure from clients to chase last year's hot funds. A key issue concerning broker-dealers is arbitration. The law authorizes the SEC to ban or limit mandatory arbitration of disputes over brokerage account issues. Whichever path the SEC chooses, brokerage firms will face more lawsuits, and this issue alone might change brokerage firm practices. For the first time, those involved with running family offices may have to register them with the SEC, as the new law seems to eliminate the exclusion that made it unnecessary in the past. This could bring more SEC reporting and oversight. For individual stock investors, the law seems a mixed bag, at least in the short run. The SEC is authorized to give investors greater access to the corporate proxy to nominate directors. Individual investors are unlikely to have much impact if they nominate a director, and mutual funds are likely to continue following the “Wall Street rule,” which means they simply sell their shares if they don't like the way a company is being managed. But index funds and activist long-term investors such as public-employee and union pension funds may make use of the proxy access to attempt to install new directors, breaking the old-boy network on corporate boards. In the meantime, however, the law may well hold back economic growth. Smaller banks, the primary lenders to small businesses, might tighten credit even further because the new law calls for them to increase their capital reserves. A slow-growth economy isn't a great environment for stock investors. There are likely many more aspects of the law which will affect investors and their advisers, and which have yet to come to light. Many of the effects will be unintended. Financial planners and investment advisers will have their hands full adapting to the law and the forthcoming regulations, and helping clients deal with the effects.