Tuesday, May 1, 2012

When More is Not Better

1 - Our New Realities: Investing public seminar is two weeks from tomorrow. (See full information in the Events section of our website, click here) This event is open to the public; please attend -- and invite a friend. We already have a healthy number of reservations, so I urge you to register soon. You can register either online or by calling Michele at 859-7001 (ext. 2).

2 - Please take two minutes to view this week's video below. It sets forth a major reason why Millard & Company is different from many other investment firms you might be familiar with, and it establishes the basis of the important article I allude to in the following paragraph.

3 - I don't often take a public position on political issues, but today is an exception. As part of the Wall Street reform package that followed the 2008 scandals, a bill known as the Investment Oversight Act of 2012 was recently introduced in the House. While its intention is to enhance consumer protections, I believe its effect would be just the opposite. Below is This Week's Economic News is an article (admittedly a fairly long article) setting forth the ways in which consumers could be harmed by this legislation.

4 - On the lighter side: Working at my office computer, I face the Depot Garden through two large windows. The garden (a pubic park maintained by our friends at the Tryon Garden Club) teems with wildlife. The bird feeder within six feet of my eyes is a center of activity, with many colorful birds vying for its treats. The bird house mounted a few yards away is home to a busy family of bluebirds. And a partially used bag of mulch stored under the building's protective roof overhang is currently sheltering a house wren and four chicks. What a great place to work!

Have a super week!


Congress' Idea of Consumer Protection: Make Everybody a Wall Street Broker

Investment advisers are not the same as investment brokers. There's a big difference - at least for now.

Talk about the fox guarding the hen house....

On April 25, 2012, Rep. Spencer Bachus of AL and Rep. Carolyn McCarthy of NY introduced a bill intended to enhance consumer protection in light of the 2008 market meltdown that took the U.S. economy to the brink of collapse.

The Bachus-McCarthy bill, also known as the Investment Oversight Act of 2012, allows the Securities and Exchange Commission to delegate its oversight of many thousands of independent registered investment advisers (of which Millard & Company is one) to a self-regulatory organization. The self-regulatory organization would be the Financial Industry Regulatory Authority (FINRA), the regulator that oversees Wall Street brokers, and which has Wall Street executives sitting on its board of directors.

Bernard Madoff was under FINRA jurisdiction for his entire career (including its predecessor organization, the National Association of Securities Dealers or NASD), and even served as a member of the board of governors of the NASD as well as on numerous committees.

We do not support handing over expanded regulatory authority to an organization that failed to prevent the flood of toxic mortgage pools and dangerous derivatives, and sat by unconcerned while the Madoff Ponzi scheme dragged on for decades.

Paradoxically, the bill would give Wall Street (through its regulatory arm) control over its most persistent competition: independent advisers who, in contrast to the Wall Street sales culture, must by law put the interests of their clients first when giving financial advice. At a time when Wall Street's credibility is at its lowest ebb, when consumers are walking away from the opportunity to send their retirement dollars into the bloated brokerage industry bonus pools, the bill offers not more transparency, not a change in the culture to put the consumer's interests first, but regulation by an organization that has a miserable track record of preventing abuse.

The cost to advisers would be stifling. The Boston Consulting Group evaluated the expected cost of FINRA regulation on registered investment advisers and concluded that the plan would add $51,700 a year in expenses for the average independent adviser. This is more than twice as much as it would cost to develop enhanced oversight by the Securities and Exchange Commission.

Another point about costs: In 2009, FINRA's leadership used the dues collected from its members to pay its top ten executives $11.6 million, to spend over $1 million lobbying Congress and the SEC, and to spend undisclosed amounts on advertisements in The Washington Post and on CNN touting its record as a regulatory body. One might fairly question the organization's rigorous stewardship of dollars allocated to regulatory efforts.

In addition, consumers and members of the press might be astonished at how little transparency FINRA operates under.

One recent example: just last year, Amerivet Securities president Elton Johnson (a former Green Beret) managed to get seven proxy votes onto the agenda at FINRA's 2010 annual meeting. These initiatives would have required FINRA to do things that any guardian of the public interest would normally do as a matter of course: tell us the compensation paid to its ten most highly-paid employees, disclose FINRA's investment transactions to members and the public, and open up its board meetings or at least provide transcripts of the board's discussions.

All seven of these initiatives passed overwhelmingly, garnering more than two-thirds of the membership vote. The FINRA board of directors debated these measures in a closed meeting, and decided to reject them.

In a cynical bit of irony, the press release accompanying the legislative proposal goes so far as to praise the supposed diligent regulation of broker-dealers and decry the so-called lax regulation of RIAs. This one line offers particular insight into where this legislation is coming from:

"Customers may not understand the different titles that investment professionals use but they do believe that 'someone' is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change," concluded Chairman Bachus.

This statement asks us to believe that the RIAs like Millard & Company, who are required by law to live up to a fiduciary standard by putting their clients' interests first in all advice-giving, are the bad guys in the marketplace and must be watched much more vigilantly, while the brokerage firms, which have resisted submitting to this tougher standard behavior, are the good guys who protect consumers.

When you connect the dots on this piece of legislation, it becomes frighteningly clear that the actual agenda is something very different from consumer protection. Yet unless the public learns about this power grab by Wall Street just a few years after it brought the economy to its knees, consumers may find themselves living in a world where everybody who gives investment advice is regulated like a broker. And that would not be good.

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