A recent round of fee hikes from FINRA will disproportionately affect smaller, independent firms, according to the Financial Services Institute.
FSI, an advocacy organization for independent broker-dealers and advisors, submitted a comment letter to the SEC opposing the increase in fees, which affect everything from advertising to central registration depository filings. Given the difficult economy and low profit margins, business at some of the smaller broker-dealer firms could suffer, the letter said.
“Increased fees on firms whose margins are tightening every day take us in the exact opposite direction. Not only would these fee increases unduly burden the industry, they would also negatively impact Americans trying to achieve their financial goals by limiting their access to financial advice, products and services,” Dale Brown, FSI President and CEO said.
FINRA revised its fees earlier in June, altering some, such as the filing fee rate, for the first time since 1970. The regulatory agency cited a need to keep up with technology and resource demands as “nature and complexity” of their business continued to change. Around that same time, FINRA also reported an $84 million loss in income for 2011.
According to FSI, broker-dealers operate on slim profit margins, as low as 1.7%, and increasing costs have quickly cut into the advising force, reducing numbers from 5,000 broker-dealer firms in 2008 to 4,400 in 2012.
“An unfortunate result of these rapid increases in broker-dealer operating costs during these difficult economic times has been the failure of IBDs and other broker-dealer firms,” the letter said.
FSI claims that the new costs will hurt broker-dealers in a number of other areas as well. For example, the letter notes that raising the new member fees and charges for annual depository filings will substantially increase the barriers to entry at a time when the industry is expecting heavy turnover.
“With the average age of the financial advisor population at nearly 49 years old, 14% of advisors over the age of 60 and less than 25% of all advisors ages 40 and younger, increasing the barriers to entry will have important real world implications,” FSI reported.
The advocacy organization took particular issue with the increases in advertising and late disclosure fees. FSI claims that independent broker dealers could see their advertising costs go up by as much as 20%.
FINRA reported that it was raising its advertising fees to deal with increased costs of doing business as well as an increase in the amount of material the regulator has to review.
“The volume of filings has increased substantially over that period, and FINRA has also upgraded its technology and hired additional staff to maintain the program’s effectiveness and ensure reasonable turnaround times,” FINRA said.
FSI claims that late disclosure fees will unfairly impact the broker-dealer industry because many of the independent firms are not able to file on certain events in time.
“In general terms, broker-dealer firms do not file disclosable events on Form U4s and U5s late because they regard the current penalties as a cost of doing business. They file late because they are unaware of the disclosable events despite considerable efforts to obtain the information,” FSI said.
According to the letter, the result will be felt most among “main street America” rather than the high net worth and ultra-high net worth space. FSI maintains that the 201,000 advisors who practice in the independent channel primarily serve those in the tens or hundreds of thousands range.
The letter encouraged the SEC and financial services firms to reject the fees.
Neither FINRA nor the SEC had an official comment on the letter, but according to their website, the SEC has officially received FSI's.
FSI has 100 financial services firm members and 35,000 advisor members. The organization regularly advocates for independent financial services providers regarding regulatory issues.
A full list of the FINRA fee increases is available here.
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