Elizabeth’s note: This story was updated Monday at 11:45 EST to add comments from Skip Schweiss, managing director, advisor advocacy & industry affairs, for TD AMERITRADE.

In the wake of the final passage of the financial reform bill, a couple of issues have grabbed headlines, including the creation of the Consumer Financial Protection Agency, new regulations of derivatives and proprietary trading, and a measure that enables federal regulators to seize any financial company whose failure threatens the financial system.

But the bill contains more than 2,300-plus pages. There’s much more of importance here for an advisor to know than just the headlines. RIABiz culled ideas from experts about what advisors ought to know about financial reform, compiling them into this summary post.

A few themes emerge. Coming on the heels of health care reform, the new financial legislation is another signal that an era of deregulation is ending and a new era of governmental activism is beginning in Washington, D.C. The other conclusion to be drawn is that Congress punted dozens, if not hundreds, of issues to regulators. The upshot for advisors: their regulators are likely to exercise both more hard power, in the form of new rules, and soft power, in the form of a more aggressive interpretation of the rules. The prime example of the latter: the SEC’s $500 million settlement with Goldman Sachs. Goldman Sachs settles to make its scandal die

Here’s more of what you ought to know:

If you have less than $100 million AUM, be prepared for change

The reform bill puts advisors with less than $100 million of AUM under the aegis of state regulators. This change from regulation by the SEC is expected to affect about 4,000 advisors, or about 75% those who had fallen under the SEC’s jurisdiction. The shift opens up many questions about whether states are prepared for the influx of advisors (the North American Securities Administrators Association assured Congress that they were). But, even though administrators are discussing ways to cooperate, regulation is likely to vary state-by-state. The big change RIAs should expect when the SEC punts to the states

It’s interesting to note that this change sailed through with little objection from the industry or regulators. “I really haven’t heard any advisor concern on this one,” says Skip Schweiss, managing director, advisor advocacy & industry affairs, for TD AMERITRADE. “By the way, this provision takes up less than one page of the 2,300-page Act.”

According to Schweiss, an exception to the new state registration rules will be made for advisors who would be required to register in at least 15 states; they “may” continue to be registered with the SEC.

As for the timing and coordination of the change, experts expect that NASAA and the SEC will organize communication with the affected advisors.

Studies and more studies

The legislation mandates 150 studies of regulatory issues, according to the U.S. Chamber of Commerce. Here’s a list of the crucial handful for advisors. “These studies are consequential,” says Neil Simon, government relations vice president for the Investment Adviser Association.

Regulation of broker-dealers and advisors and the fiduciary duty

The SEC was mandated to study, for six months, the issue of how to harmonize regulation of advisors and broker-dealers. Improbable win for fiduciary standard: Congress set to hand SEC power to impose fiduciary duty on broker-dealers. The way the legislation is written ensures that the question of whether and how the fiduciary duty ought to apply to broker-dealers will be taken into account, and it gives the SEC the power — after the study is completed — to extend the fiduciary duty to broker-dealers when they are dealing with retail customers.

Regulation of advisors by an SRO

Though it’s received much less attention than the possibility of new fiduciary obligations for brokers, the legislation also authorizes the SEC to study whether a self-regulatory organization should regulate investment advisors. Simon, who highlighted this study as one of the most important elements in the bill for advisors to know about, says this study could lay the groundwork for the SEC to shift oversight of advisors to FINRA, which is a self-regulatory organization. That’s a move the IAA opposes. However, most experts agree that the SEC could not delegate oversight of advisors to an self-regulatory organization like FINRA without Congressional authorization.

In addition to that study by the SEC, Kristina Fausti, director of legal and regulatory affairs for Pittsburgh, Pa.-based Fiduciary360, points out that the reform legislation also requires a study to be completed over the next 5-8 months by an independent consultant tasked with reviewing the SEC’s organizational structure and reliance on self-regulatory organizations.

“Given that several SEC Commissioners have made comments in the past that favor an SRO model and FINRA continues to assert that it can take on the job of adviser oversight, advisers will need to pay close attention to the SEC’s study and final report on oversight and whether the agency indeed believes that an SRO is needed,” Fausti writes. “Add the additional report to be supplied by the independent consultant, and there could be a lot for Congress to mull over that could significantly impact adviser oversight in the future.”

“This is probably the one element of the bill that gives many in the advisory industry the most concern,” says Schweiss of TD Ameritrade. “Some feel this is an open door for FINRA to become the SRO for the investment adviser industry. Some in the industry feel that FINRA lacks sufficient expertise in the investment advisory industry to effectively handle such a responsibility. Others, including such industry luminaries such as Pershing CEO Richard Brueckner and eminent advisor Harold Evensky, beg to differ.” Why Harold Evensky believes that a FINRA-as-devil attitude is counterproductive.

Here’s the language of Section 914 that calls for the study:

SEC. 914. STUDY ON ENHANCING INVESTMENT ADVISER EXAMINATIONS.

(a) STUDY REQUIRED.—

(1) IN GENERAL.—The Commission shall review and analyze the need for enhanced examination and enforcement resources for investment advisers.

(2) AREAS OF CONSIDERATION.—The study required by this subsection shall examine—

(A) the number and frequency of examinations of investment advisers by the Commission over the 5 years preceding the date of the enactment of this subtitle;

(B) the extent to which having Congress authorize the Commission to designate one or more self-regulatory organizations to augment the Commission’s efforts in overseeing investment advisers would improve the frequency of examinations of investment advisers; and

(C) current and potential approaches to examining the investment advisory activities of dually registered brokerdealers and investment advisers or affiliated broker-dealers and investment advisers.

Regulation of financial planning

Fausti, Schweiss and Robert Glovsky, chair of the CFP Board of Standards, highlighted a fourth study: one by the General Accounting Office that will report on an appropriate regulatory structure and scope of regulations for financial planners. Though the GAO’s recommendation is likely to have some weight, actual regulation of financial planning would require Congressional action.

“This is a win for the industry, a step in the direction of its long-held goal of being recognized as a profession,” says Schweiss. “This is another six-month study, to cover things like consumer confusion about certifications, how planners are using designations and communicating with clients through marketing material, and what a self-regulatory organization might look like for planners.”

Financial literacy

Fausti pointed out one overarching theme that’s likely to take center stage in the studies and any ensuing rulemaking: Disclosure. “For example, under its new rulemaking authority related to the fiduciary standard, the SEC is required to facilitate ‘simple and clear disclosures to investors’ regarding their relationships with broker-dealers and investment advisers. In addition, as a part of a study on investor financial literacy, the SEC is required to identify ‘methods to improve the timing, content, and format of disclosures to investors’ about investment products and services.”

The SEC’s more likely to bare its teeth.

Everything in the legislation and the changing culture in Washington, D.C., points to a more aggressive SEC, though resources will remain a significant question and constraint.

Fausti writes, “In addition to what is required under the bill, advisors should be aware that the SEC intends to complete any rulemakings and initiatives it has started since Mary Schapiro took over the reins of the agency.” Last week, the SEC adopted changes to Part 2 of Form ADV, and put forward a proposal on 12(b)1 fees. “It is clear that we have entered a new regulatory era that calls for greater transparency and accountability, and the SEC appears to be dedicated to keeping a brisk pace to move forward its regulatory agenda in order to achieve those results.” How the new 12b(1) fee restrictions could transform the financial advisory industry.

The legislation requires hedge funds and private equity advisors to register with the SEC as investment advisors and provide information about their trades and portfolios necessary to assess systemic risk, according to the summary of the bill found on the Senate Banking Committee’s web site. “Despite the decrease in advisers required to register at the federal level, the SEC’s resources will likely still be spread thin given that advisers to hedge and other private funds will now be required to register with the SEC,” says Fausti.

The legislation gives the SEC authority to restrict mandatory pre-dispute arbitration provisions in brokerage and advisory contracts. Investor advocates have long criticized the common practice of including such provisions in contracts. “It remains unclear, however, whether and how the SEC will use this new authority,” says Fausti.

The legislation creates a program within the SEC to encourage people to report securities violations, creating rewards of up to 30% of funds recovered for information provided, according to Patrick J. Burns, a Beverly Hills-based lawyer who also runs an affiliated compliance firm, Advanced Regulatory Compliance.

Municipal advice

Burns also pointed out change that affects advisors who give advice to municipalities:

The legislation: (i) requires registration of municipal advisors and subjects them rules written by the MSRB and enforced by the SEC; (ii) seeks to put investors’ interests first by ensuring that at all times, the MSRB Board must have a majority of independent members, to ensure that the public interest is better protected in the regulation of municipal securities; (iii) imposes a fiduciary duty on advisors to ensure that they adhere to the highest standard of care when advising municipal issuers, he wrote.

Winners and losers and the effect on the market

The consensus of the mainstream media — not to mention the markets — seemed to be that the legislation will take a bite out of big banks’ profitability, though not, perhaps, as big a bite as the banks had feared.

In an interview with Investment Advisor magazine, Chip Roame, head of the Bay Area consulting firm Tiburon Strategic Advisors, speculated that the reforms could mean more pressure on the private-client groups at the banks.

“Bank of America-Merrill Lynch and Wells Fargo will probably be most impacted by consumer-lending reforms on the banking side … not so much on the high-net-worth side,” Roame explained. “But, still, the banks are going to make less money, and then could try and gouge [advisors] more to keep up margins. Thus, these reforms could impact the private-client groups of these institutions, as well as J.P. Morgan.”

The legislation puts pressure on wirehouses to adapt to a different business model. There are already signs that wirehouses are trying to learn the fiduciary model and find ways to branch out. Wells Fargo emerges as independent channel competitor.

Even as they bring their considerable lobbying clout to bear as regulators begin to shape rules out of the legislation, the wirehouses clearly are aware the wind is shifting.

Stephen Winks, principal of SrConsultant.com, envisioned the long-term consequences of reform in this e-mail:

Dodd-Frank will profoundly impact the business as it requires the industry to modernize.

Brokers are transported from an environment where no advice is provided to a business that supports expert counsel for each of the ten major market segments advisers serve. It has been a violation of internal compliance protocol to acknowledge the broker renders advice and have a fiduciary obligation to act in the client’s best interests, essentially providing the industry its principle defense in arbitration proceedings in managing client disputes. If no advice is provided, then brokers are absolved from any responsibility for their recommendations.

Brokers are still not accountable for their investment recommendations but must provide transparency of investment cost and their compensation and disclose or manage conflicts of interests. The major innovation is that advisers are responsible for their investment recommendations requiring massive innovation in portfolio construction and management and the resources advisors use.

Brokers sell investment products with no accountability while advisers address and manage investment and administrative values on behalf of their clients in their client’s best interest. The resulting personalized investment advice provided by advisers is held to the fiduciary standard of care based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters. Depending upon how the industry approached portfolio construction, its margins could be greatly expanded to look more like those of a money manager than a broker/dealer while achieving three times the multiple. This places a premium on the prudent processes, technology, functional division of labor, statutory documentation, conflict of interest management, and advisory services support which will safely bring easy to execute fiduciary standing within the reach of every adviser and ultimately every client.

This entails a long overdue degree of change that could not be achieved without an act of Congress, which literally modernizes the industry in the consumer’s best interest.

Harvard’s Clayton Christensen tells us the biggest mistake established firms make when faced with industry-redefining innovation is their looking at innovation in the context of their existing business model when a new business model is in order.

We are about to see the emergence of new market leadership.