This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

FINRA Fee Increases May Raise Sticker Price on Financial Advice

By ,

August 1, 2012 • Reprints

More On Legal & Compliance

from The Advisor's Professional Library
  • Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation.  Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.  
  • Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIA’s failure to stay within the scope of the Section 28(e) safe harbor may violate the advisor’s fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients’ transactions.

FINRA’s proposed 25% increase in the fees that it collects from financial service firms may become a reality within the next few months, and it is important that all financial advisors stop and take note of the potential consequences.

Despite industry objections, FINRA has continued to argue that the fee hike is essential to its ability to effectively continue its regulatory mission in today’s financial environment. Unfortunately, because this additional expense will significantly increase the cost of providing financial advice, these fee hikes might spell the end of widespread access to financial services for many of your middle-market clients.

Mechanics and Rationale Behind the Increased Fees

The 25% increase would raise the fees that FINRA collects for registration and membership applications, including continuing membership applications. New membership application fees would increase from a minimum of about $3,500 to a minimum of $7,500 for the smallest financial advisory firms. FINRA would also increase the fees it charges to review advertising and sales literature developed by financial services firms to $125, up from $100, for the first 10 pages of materials.

According to FINRA, the increased fees are needed to offset the decline in fee volume caused by lower trading levels in recent years. Further, FINRA claims that raising fees is necessary to continue operating what has become a much more complicated regulatory organization, also arguing that it has not increased fees in several years. The organization has also sought to justify the increased costs based on the higher number of organizations that it oversees.

Industry Objections

The Financial Services Institute (FSI) is one industry group that has filed a statement urging the SEC to put a stop to the increased fees (see news article on FSI’s opposition from AdvisorOne, and see FSI President and CEO Dale Brown’s AdvisorOne blog on the issue). The FSI submitted a comment letter to the SEC, arguing that raising FINRA fees will disproportionately impact smaller financial advisory firms and independent advisors who are operating on slim profit margins in the current fee structure.

Many smaller firms that currently provide more affordable financial advice to middle-class individuals and small businesses may have no choice but to raise the fees they charge for advisory services to make up for the higher FINRA costs.

According to the FSI, increasing fees in the past four years has caused many smaller advisory firms to fail, reducing the number of firms from 5,000 in 2008 to 4,400 today. Increasing fees now would not only cause this trend to continue, but higher new membership fees could deter small firms from opening in the first place.

The Investment Company Institute (ICI) has argued that FINRA has failed to properly justify the increase in fees, rejecting as illogical the argument that FINRA’s job has become more complex based on increasing membership numbers. Higher membership numbers would have automatically caused an increase in FINRA revenue because each organization must pay the relevant fees so, as the ICI noted, adding members logically means that FINRA collects more in fee revenue.

Conclusion

Despite industry objections, it is very likely that some form of increased FINRA fees are coming in the near future. Advisors should pay attention to the final rules to determine how these fee hikes will affect their businesses and clients.

-----------------

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s Summit Business Media partner, National Underwriter Advanced Markets, for a free trial.

You may also be interested in signing up for a free trial with another Summit Business Media partner, Tax Facts Online.

Page 2 of 2
About the Author
William H. Byrnes, Esq.

William H. Byrnes, Esq.

Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow

Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow, is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of 10 books and treatises and 17 chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.

He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.

Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).

Email: wbyrnes@nationalunderwriteradvancedmarkets.com

About the Author
Robert Bloink, Esq., LL.M.

Robert Bloink, Esq., LL.M.

Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.

Previously, he served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country.

 

Mr. Bloink's insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures. 

Related Articles
Comments

Advertisement. Closing in 15 seconds.