A timely idea room

April 9, 2012
| By Pete Daly |
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The Dodd-Frank Act has the financial services industry scratching their heads, and it often drives the brainstorming in the new “idea room” set up at the Kentwood headquarters of Regal Financial Group LLC and Regal Investment Advisors LLC.

Due to Dodd-Frank, the industry is “changing dramatically, and we’re excited about the opportunity. That’s why we have the idea room,” said John A. Kailunas II, chairman of the companies.

This winter, Regal transformed a traditional business conference room into a space that is designed specifically to support creativity in business planning. The room is also a place to help advisors develop their practices and complete strategic planning, using cork boards, conference equipment, a small library, electronics, and one wall finished in dry-erase paint from floor to ceiling.

Use of the room is a very informal process, Kailunas said, which includes letting their hair down and having a little fun — “but there is constructive work that comes out at the end of it.”

The idea room “will help us communicate, develop, build and grow our affiliates’ practices. Ideas that are developed and vetted in the Idea Room can be taken to either our digital studio and/or marketing department to be further expanded,” he said.

“We’re not looking at things in a traditional sort of way,” said Kailunas, who was one of the founders of the Regal organization in 2000.

Things have changed in the financial services industry since the Great Recession clobbered the world economy along with the stock market and U.S. financial industry.

“It’s not your daddy’s market, where you could put in a couple of bucks and watch it slowly grow,” said Kailunas. “(Now) it’s topsy-turvy.”

Dodd-Frank, of course, is a direct result of the recent turmoil in the finance industry. Under the act, people in the industry are supposed to be operating in greater openness and transparency, and their customers are supposed to be much better informed about what is happening to their money.

“But they keep creating new products and services that even brokers are struggling with. It’s sort of a paradox,” said Kailunas.

He said Regal has grown about 21 percent over the past two years and now has 110 brokers across the U.S. and 10 full-time employees in its 10,000-square-foot Kentwood headquarters at 2687 44th St. SE. The organization is licensed in all 50 states but focuses predominantly on the Midwest. Two years ago Regal reported an estimated $1.4 billion worth of assets under management.

One example of a topic the firm attacked in its brainstorming room is the 401(k) market, which Kailunas said is dramatically shifting because of new regulations announced last year under the Employee Retirement Income Security Act in regard to the fiduciary responsibilities of companies to act in the best interest of their employees.

In the past, both employers and their employees did not always receive full disclosure on fees charged to their 401(k) accounts, so the Department of Labor now mandates transparency. New regulations require all participants in 401(k) plans — including administrators, records keepers and investment advisors — to reveal all of their charges against the accounts.

Kailunas said that once the American worker “finds out he’s paying 2.5 to 3 percent to somebody that he never sees, he is going to start making inquiries to his employer, and the employer is going to start making inquiries to the broker.”

“We’re ahead of that curve,” said Kailunas. “The government has been very slow in rolling that out, extending the deadline because the industry isn’t ready yet. But we’ve used the idea room to get ahead of the curve and be in position to move forward.”

There are two fiduciary responsibility standards under the ERISA law; Kailunas said Regal will be operating under ERISA 3(38), which is “going to hold us to a higher standard than the average broker. That idea came out of the idea room.”

Regarding the Dodd-Frank Act, Kailunas said its intent was pure, in that it is supposed to help the consumer with any type of rules and regulations. But he added that ambiguities within the act have not been clarified yet by Congress.

Much of the uncertainty is in regard to the new Registered Investments Advisor model created by law. RIAs managing assets of less than $100 million must register with the state securities agencies in the states where they operate. RIAs who manage $100 million or more must register with the U.S. Securities and Exchange Commission and can then operate in any state without being regulated by the state agencies.

“We are an SEC firm,” said Kailunas, noting that it is much easier to be an SEC firm because the state regulations vary from state to state. In fact, before it became an SEC firm, Regal once attempted to operate in Illinois under that state’s rules but found the rules so difficult it pulled out.

Kailunas said many investment advisors can’t reach the $100 million threshold to be SEC regulated, which is leading to mergers to form organizations that can meet the $100 million requirement. “We picked up a firm in North Carolina and we’re picking up a couple others this summer, because of that.”

The SEC has been regulating the investments advisor industry for many years, but the organization is understaffed, according to Kailunas, and it is not clear who will be regulating the RIAs.

“We obviously don’t want any more Bernie Madoffs,” he added, “but who is going to regulate the RIAs?”

Some believe it should be FINRA, which regulates brokers-dealers. FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. The organization examines securities firms, writes rules, and enforces those rules and the federal securities laws.

“Is there going to be a new self-regulating organization created or is FINRA going to do it? Or is the SEC going to get the budget to do it properly?” said Kailunas. “Certain people out there want a new self-regulating organization, because they see flaws in FINRA and how they do things.”

Late last year, Boston Consulting Group was commissioned by TD Ameritrade to do a study of the industry that concluded that a FINRA-run self-regulatory organization for the RIAs would cost nearly twice as much as funding the SEC to do the job.

Kailunas said he would prefer to have the SEC continue to regulate the industry, but create a new type of certification for accounting firms, and then have independent accounting firms do the RIA audits.

“That takes it away from the federal government, but puts it in the hands of competent people who can give a third-party credibility to what we do as an industry,” he said. Such an arrangement “obviously makes sure we are policed and regulated to a little bit higher standard than we currently are.”

“Congress has been diddling for the last three years,” said Kailunas. “I think that with some clear leadership and some direction, the economy would blossom.

“I think a lot of investors are sitting on the sidelines, not knowing really what do to. How are we going to be taxed?” he said, regarding capital gains, estate taxes and others.

“Our corporate tax rate is keeping America in check, in comparison to the competition across the world. Once there is some clarity, as soon as the American economy knows what is going to transpire, we are going to have a nice pop in the economy,” he said.

As for Dodd-Frank, the intent is good, said Kailunas.

“I don’t think there is a broker out there who doesn’t want transparency or doesn’t help their clients. That’s 99 percent of our industry. The scalawags are always going to be scalawags, and no amount of legislation is going to stop a thief from stealing. But getting some clarity would help the industry out.”

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