The reform to major portions of the America’s financial
system, named the Financial Reform Bill, is set to create a myriad
of ripple effects across the US banking system. Charles Davis
speaks to US-based wealth managers for their take on its
impact.
Go deeper with GlobalData
The death of the oldest
member of the United States Senate, 92-year-old Senator Robert
Byrd, turned what was expected to be the passing of sweeping
regulatory reforms into anything but. US congressional lawmakers
have now passed the Wall Street regulation bill, which could
have a multitude of impacts on wealth managers.
Private banking observers told
PBI the 2,300-page bill contains hundreds of seismic
shifts to the financial regulatory landscape, including several of
interest to wealth managers.
The Financial Reform Bill launches
a powerful, independent consumer-protection bureau, sets up an
early warning system for financial groups deemed too big to fail,
revamps oversight of credit agencies, and directs much of the
$600trn over-the-counter derivatives trade through clearing houses
and exchanges.
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By GlobalDataRegulators
rule
The most striking feature of the
legislation may be the extent to which it turns key questions over
to federal regulators. When it comes to decisions about how to rein
in complex, previously unregulated securities and liquidate large,
interconnected failing financial firms, the bureaucracies in charge
of setting the rules get plenty of discretion.
Todd Millay, managing director of
the Wealth Management Group at Choate Investment Advisors, says the
central question is whether financial advisers now have a fiduciary
duty to all clients for all financial instruments.
“The degree to which there is a
fiduciary duty is, for wealth managers, a game changer,” says
Millay, whose unit is responsible for nearly $3bn in assets for
high net worth individuals and families.
“I’d expect to see one of the
things that could come out of this is a higher standard of duty. If
the duty is heightened and the adviser is less of a salesman and
more of a true wealth manager, that will usher in a wave of related
regulatory changes aimed at greater disclosure and the elimination
of real and perceived conflicts of interest.”
Wealth managers must
reorientate
Eric Daugherty, a principal and
director of research at the wealth management consultancy kasina,
says wealth managers should be thinking ahead with respect to the
fiduciary standards that are coming.
“Regulators will have the authority
to require all financial advisers to act in their clients’ best
interest. Practically speaking, this means disclosing fees, any
disciplinary actions and potential conflicts of interest, such as
commissions,” Daugherty says.
“Those who cannot truly hold
themselves out as fiduciaries now have some re-orienting and
documenting to do. If I were a wealth manager today, my materials
and all my deliverables would lay out my standard of care for
clients,” says Daugherty.
Additionally, transparency is
becoming a bigger issue that will play into the fiduciary standard,
he says. Ensuring that advice given to clients, and products
recommended to them, are not just suitable but are in the best
interest of the client will raise the stakes for documentation.
A good piece of
legislation?
Overall, Daugherty sees much in the
emerging legislation to like.
“Most of the provisions in the bill
will benefit wealth management long-term,” Daugherty says. “We hold
people’s futures in our hands. When those people do not trust our
motives or methods, trust needs to be re-established.
“The provisions of the bill, from
the creation of the Bureau for Consumer Protection, to the possible
fiduciary standard will signal to consumers and investors that the
financial industry is their ally, not a shyster digging in their
pockets. Wealth managers should be looking to project this message
of confidence, transparency, and fiduciary care to their clients,”
he adds.
There are other items in the
legislation of interest to wealth managers, too. The legislation
would establish a modified version of the so-called Volcker Rule,
and generally prohibit banks from engaging in proprietary trading
or holding or obtaining an interest in a hedge fund or private
equity fund.
Hedge fund
restrictions
Nonbank financial firms would be
subject to additional capital requirements and quantitative limits
with respect to their proprietary trading or investments in or
sponsorship of a hedge fund or private equity fund.
Also of prime interest to the
industry will be the final rules on derivatives, how much money and
assets they must have on hand, and to what degree they will have to
give up their securities trading activities. On each of those
matters, the legislation leaves key decisions to regulators.
“But that’s just the first act of the drama,” Millay says. “It
gets really interesting once the President signs a bill.”
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