Brian Hamburger answers the questions about an SRO future that has RIA stomachs in turmoil

Brooke’s Note: We’ve all been there – getting in trouble not because we did anything wrong but because we broke an arbitrary rule. For all but the least-sensitive souls, there’s a feeling of sickening injustice. With FINRA’s rules-based approach plausibly on the verge of supplanting the SEC’s principles-based system, RIA principals are rightly concerned. What if their firms need to choose between doing what’s right and following the rules? No one has a crystal ball to foretell how this will all play out – and perhaps FINRA isn’t so bad, after all. But presumably Brian Hamburger is a better prognosticator than most because he grapples with these questions every day.

Investment advisors are right to be apprehensive about the slow-motion fallout from the Dodd-Frank Act, says founder and managing member of the Hamburger Law Firm and founder and managing director of MarketCounsel — but not because it puts the future of RIAs in jeopardy. At least not much.

In an interview on day two of the MarketCounsel Summit 2011 in Coral Gables, Fla., Hamburger shared his thoughts about what many fear will be the eventual regulatory dominion of FINRA over investment advisors.

Good news/bad news

The good news, Hamburger says, is that no matter what happens, advisors will continue to thrive. “People want unbiased advice. The more they understand [what that means] the more they will want.”

The bad news, however, is that under FINRA, RIA firms — seeking economies of scale by necessity — would inevitably come to resemble the wirehouses from which many of them fled in order to establish their independence.

He compares the RIA community to unique businesses and shops in an artsy New York City neighborhood.

Broker-dealers, on the other hand, are like big-box stores – massive, impersonal and identical.

Big-boxification of RIAs?

Hamburger fears that RIAs will become “like Petco as opposed to Aunt Sally’s pet shop.”

Currently, he says, “the only thing [advisors] have in common is that they give advice for compensation.”

Hamburger attributes this to advisors’ backgrounds. Many, he says, never went to college. And becoming an RIA is often a second career. (There are a lot of former engineers in the mix, he says.)

“Their different perspectives are the value for clients, he says. “[For] B-Ds, it’s about the value of their portfolios. For advisors, it’s about family involvement; they’re interested in people.”

Beyond mom and pop

Ironically, Hamburger says a main focus of MarketCounsel this year is encouraging independent advisors to move away from a mom-and-pop-shop mentality.

“It’s about stepping away from brokerage to making a business,” he says, and “creating a business that’s bigger than themselves so that they can pass a legacy to younger advisors.”

Down the path of least resistance

Hamburger declined to handicap the odds of FINRA overseeing advisors, but he sounds fatalistic about the prospect.

“I’m an eternal optimist, but I don’t want to underestimate the forces in play. People on Capitol Hill don’t know the difference [between RIAs and B-Ds]. Congress will take the path of least resistance. It’s easier than reforming the SEC.”

Still, MarketCounsel has vowed to do everything in its power to keep that from happening. And, although he recoils from the word “lobbyist,” Hamburger knows that means engaging in active advocacy with lawmakers.

“We don’t want to be known as a lobbyist who comes in with statistics and figures. We have advisors’ stories to tell. I don’t want to deal with statistics. I want to deal with stories.”

For two more articles looking at this subject, see:

Why advisors see FINRA as the devil.

Why Harold Evensky believes that a FINRA-as-devil attitude is counterproductive.