Finra’s business model differs from that of the SEC and state regulators in one way that it doesn’t talk about loudly or very often:
The fines it garners from nabbing the bad guys go directly to its bottom line. By contrast, the SEC doesn’t get to keep any of its bounties. The checks from the likes of Steve Cohen and Rajesh Gupta go directly back to the Treasury, home of the taxpayer, or to victims in need of restitution. The fines from Joe Broker go directly to Finra coffers. You could say that Finra eats what it kills. You could also say conflict of interest.
I’ve been an executive recruiter for 28 years, working with financial advisors at wirehouses, regional and independent firms.
So how did I come to write and article criticizing Finra’s conflict ridden business model? Isn’t that a little outside of my typical focus?
In the past few years I’ve gotten to know a lot of RIA’s and have familiarized myself with their business model. I noticed early on that RIA’s didn’t have anywhere near the same animosity toward the SEC that Series #7 advisors had toward FINRA. The SEC’s principles-based approach struck me as a lot more sensible than the rules-based Finra regimen. The SEC monitors and evaluates advisors in terms of the consistency of their actions with a fiduciary standard. Unlike Finra, they are not playing a ‘gotcha’ game enabled by an ever expanding set of rules and regulations.
I also observed that both attorneys and compliance consultants who worked with breakaway advisors from the wirehouses, often advised them to try and get rid of their Series #7 by the end of the first year of their independence. “It’s not worth having a Series 7 from a compliance standpoint ” was the advice they were given.
When Chris Winn of Advisor Assist explained to me that unlike the SEC, Finra keeps all the fees that it levies, it all came together for me. I understood that Finra’s compensation structure doesn’t reward it for being a fair and dispassionate judge. Instead, it incentivizes it to act as an an aggressive bounty hunter so that it can feather its own nest.
I wrote this article to publicize Finra’s conflicted business model in the hope that somehow it might be corrected. I also wrote it so that advisors who are choosing independence would be aware of the regulatory consequences of joining an independent broker dealer versus an RIA and would factor that into their decision making.