Secrets of the Wirehouse: Self Regulatory Bodies Favor…Themselves

Most consumers don’t know that there are two primary regulators for financial advisors. Further, most don’t know that one of those bodies is not governmental, but a self-regulatory body.

Advisors who charge fees are generally regulated by the Securities and Exchange Commission, a government regulator, but “Advisors” who earn a living by selling products (receive commissions in exchange for selling mutual funds and variable annuities) are regulated by an entity known as FINRA, the Financial Industry Regulatory Authority, which is a self-regulatory body.

A self-regulatory body has a big hurdle to jump in proving that they are working for the consumer and not their own interests. While I believe FINRA does many things well, there are many conflicts of interests that are simply not addressed and I’m not of the belief that consumers are put first by this organization or its members.

One example of the problem with FINRA is how it discloses problems related to the brokers it claims to regulate. Financial Planning magazine recently ran an expose on the disclosure tool, BrokerCheck and the arbitration (usually mandatory) process.

In “Deleted: FINRA Erases Many Broker Discipline Records”, Ann Marsh uncovers a practice most consumers would find abhorrent. She writes:

“A Financial Planning investigation of this regular practice not only raises questions about the value of BrokerCheck, but more crucially about whether the arbitration system used by FINRA’s leadership is rigged to hide investor complaints that could have provided a warning to other investors.”


“Absent an overhaul of the process, critics say FINRA will essentially remain a private club sitting in judgment of its own membership. Due to arbitration clauses investors sign when they become clients, investors are forced to seek justice from a group composed of industry players.”

It’s a complaint that has been made many times in the past. How can an organization that is run by the industry protect consumers? Also, why are there two different (actually three when you factor in the insurance industry regulators) regulatory bodies for the “Advisor” community? Shouldn’t all people claiming to be an Advisor be subject to the same rules?

The arbitration and expungement process is essentially a sham according the article, one attorney calling it “a kangaroo court”.

There is enough in the article to make you irate…so pour yourself a glass of your favorite wine and take a few sips before digging into this great expose.

Read the full article here. Note: you may have to create a login, sorry.


Scott Dauenhauer, CFP, MPAS, AIF


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