The chairman of a congressional subcommittee yesterday said he will call on the Securities and Exchange Commission to determine whether there is sufficient abuse in financial planning to warrant further regulation.
Rep. Timothy Wirth (D-Colo.) bemoaned the current lack of information about how many planners exist and how they are supervised, who is getting hurt and whether more consumer protection is needed.
He called for action by the SEC after conducting a subcommittee hearing, the first devoted to the growing industry, which advises clients how to manage their financial lives. Estimates of the number of planners range from tens of thousands to hundreds of thousands. The industry does not regulate itself, although many of its practitioners, such as accountants and stock brokers, are regulated by state or federal government. Observers say the problem is a fringe element.
The amount of alleged -- but not proven -- fraud each year amounts to $90 million, according to state securities regulators. Yet, that represents only a small fraction of 1 percent of the $1.2 trillion in funds under management, SEC Chairman John S. R. Shad said. Moreover, the ratio of complaints to cases prosecuted by the SEC has not increased significantly in the past five years, despite 140 percent growth in investment advisers.
Investment advisers, who are paid to give advice about securities, are registered with the SEC. Critics charge that the agency does not inspect these advisers frequently enough. Yet Shad said yesterday that inspections have increased 125 percent, and the agency is targeting the small percentage of advisers who have actual custody of clients' assets.
"I don't believe there is enough abuse out there to justify additional regulation," Shad said. "We shouldn't act on circumstantial evidence." He said the most egregious abuse is in small dollar amounts, which often represent people's nest eggs.
Shad was followed by three investors who said they lost their nest eggs at the hands of unscrupulous financial planners. They described their financial naivete, ignorance about their planner's background and frustration in getting help from the government. "I don't know which regulatory thing is which," said Shirley Taylor Nelsen, an Iowa nurse who said she lost $25,000. "We need your help in identifying and evaluating this profession," she told the panel.
When informed that anyone could become a registered investment adviser by sending $150 to the SEC, she said, "It's a disgrace, a violation of all of us." The SEC is proposing to raise the registration fee to $800 and charge an annual fee of $800.
But the adviser for another investor, Robert Smith, was registered with the SEC, according to the committee. He nevertheless absconded with $8,000 of Smith's money and more than $900,000 of other investors' funds, Smith testified. Smith, a retired Colorado carpenter, said an attorney wants up to $12,000 -- the rest of his life savings -- to sue the adviser.
The SEC has issued a list of 10 "red flags" for investors, such as including never succumbing to high-pressure telephone-sales tactics, and the Institute of Certified Financial Planners has a list of 10 questions prospective clients should ask about a financial planner's background and education.
While everyone agreed on the need to educate consumers about financial planning, industry witnesses and their regulators argued against further regulation.
The majority argued that current registration with the SEC is adequate if enforcement is increased. Wirth urged the parties to sit down with the SEC and agree on the best regulation.