Regulation and Structure: Changes Ahead?

canstockphoto17973116

The investment world is changing rapidly in the face of evolving regulation and market forces. This article describes how coming changes may affect us—and you.

Clients know we have been affiliated with LPL Financial (LPL) for a very long time, since 1994, in fact. The relationship actually has two parts. LPL is both a registered investment advisor with the Securities and Exchange Commission and a broker/dealer regulated by FINRA.

As an Investment Advisor Representative of LPL’s SEC-registered investment advisor, I offer investment advisory accounts under LPL’s auspices and rules. These arrangements are fee-based, and hold me to a fiduciary standard where your interests must come first. As a registered representative of LPL, I offer securities on a brokerage basis. This is more of a sales-type situation, where my legal obligation is to present recommendations that are ‘suitable’ when made.

In practice, we have always strived to put your interests first, to focus on improving your financial situation, no matter the legal form of our relationship. This has worked well as a business strategy. It frees us from worrying about our needs or goals, since the better off you are, the better off we figure we will be. But the world is changing.

We see two main impacts of evolving regulation.

1. The investment advisory side of the business will become increasingly important, since the fiduciary relationship is more in keeping with the spirit of the regulations.

2. The brokerage side of the business will have fewer choices and more restrictions as investment firms seek to limit the conflicts of interest that come with wide variation in compensation and fees on brokerage products.

As we think about how to best serve your interests and meet your needs, we have reached some tentative conclusions:

A. The increasing emphasis on fiduciary investment advisory accounts fits well with the trends that make sense for us and for you. Our research and portfolio management processes are more effective and more efficient than ever before, and we continue to hone our processes.

B. In order to preserve the ability to continue to offer our traditional research-intensive, contrarian, value-oriented philosophy, we may have to form our own registered investment advisor. We would only take this step if our methods and philosophies become difficult to implement under LPL’s rules.

C. If we do form our own registered investment advisor, we would probably operate as ‘hybrid’ advisors using LPL Financial on the brokerage side, and to hold client assets, provide accounting and statements as they do now on the advisory side. Your assets would not be going anywhere different. The change would be minimal.

The irony is that if we were doing what everybody else is doing, life would be simple and we would not have to think about changing our structure to maintain our practices. In our opinion, we are different—and YOU are different. Generally, you and we are less sensitive to volatility, more focused on the long term, and more confident that things work out over time.

In a sense, the regulations codify conventional wisdom with which we disagree. The short version of this essay: we will do what we need to do to continue to bring you our philosophy and strategies and methods. Clients, if you have any questions or comments about this or any other issue, please email us or call.


Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk, including possible loss of principal.