(October 5, 2008 8:32 pm) --Taxes and regulation of the financial-services industry are among the top concerns of financial advisors this election season.

Arbitration reform also ranks high on the list of sweeping changes a new administration could initiate in 2009.

The credit crisis and recent financial market volatility have underscored the need for industry reform. Concerns about a new administration's impact on regulation - and its potential effect on advisors - have preceded Wall Street's meltdown by months.

The unveiling of the U.S. Treasury Department's regulatory blueprint in March was the first in a series of developments to bring the issue into focus. Since then, Lehman Brothers Holdings Inc. (LEHMQ) has filed for bankruptcy, while other U.S. investment banking giants have either merged with financial institutions or become bank holding companies. The federal government also has rescued mortgage and insurance behemoths.

A proposed $700 billion federal banking bailout package failed in the House of Representatives on Monday, and the Senate is expected to vote on a modified plan Wednesday night.

"This is not your father's election anymore. The whole world has changed" in recent days, Deena Katz, associate professor at Texas Tech University and chairman of wealth management firm Evensky & Katz, said in mid-September.

The bailout effort doesn't specifically address the business of providing financial advice to individuals. But regulation of stockbrokers and investment advisors could enter the debate on financial-service restructuring through proposals on regulation, tax and arbitration.

Regulatory Landscape Shifts

Securities industry experts say regulatory reforms are needed, regardless of who is elected president.

"The issues confronting financial services aren't really - or shouldn't be - partisan. They're issues that require good thinking from Republicans and Democrats alike," says Harvey Pitt, former chairman of the Securities and Exchange Commission, who now heads Kalorama Partners, a Washington, D.C. consulting firm.

Pitt envisions a system that preserves existing functions, such as deposits and investor protections, but reduces the number of oversight agencies and overlaps, conflicts, and gaps that exist under the current system.

Fred Joseph, president of the North American Securities Administrators Association, an investor protection organization, says investors often wrangle with the distinction between national banks, which are regulated by the Office of the Comptroller of the Currency in Washington, D.C. and state banks, which he oversees as securities division commissioner for the Colorado Department of Regulatory Agencies.

"When a customer has a problem with a national bank - I have to send them to Washington, even though it's doing business in Colorado. Imagine saying that I can't help them - and then being the customer who has to call Washington," he says.

A more unified regulatory structure would provide necessary clarity for financial advisors and investors on the roles and responsibilities of financial professionals, research firm Cerulli Associates said in a report this summer.

Treasury's blueprint calls for the Federal Reserve to play a larger role in overseeing the financial system and for the merger of the Commodity Futures Trading Commission, which regulates futures, and the Securities and Exchange Commission, which regulates the securities market.

Changes May Impact Advisors

Creating a new regulatory structure ultimately could change or eliminate entities to which financial advisors currently report - and the corresponding rules governing their practices.

The Treasury blueprint recommends that investment advisors, whom states and the SEC currently regulate, be subject to a self-regulator such as the Financial Industry Regulatory Authority, or Finra, which oversees securities firms in the U.S.

Distinctions between stockbrokers and investment advisors have blurred as brokers move away from selling stocks on commission and toward charging clients a fee for managing their money and providing comprehensive financial advice.

The SEC also is considering policy aspects of the distinction between broker and investment advisor. In January, a RAND Corp. study commissioned by the agency found that investors are confused by the difference between brokers and investment advisors but are satisfied with their financial service providers.

SEC staff was to develop policy options based on the findings by late April, but acute problems in the financial sector surely have taken precedence.

A spokesman for the Securities Industry and Financial Markets Association, or Sifma, a Washington, D.C.-based trade organization, said the organization will be following the issue in its 2009 agenda.

Regulatory changes also may boost compliance costs for brokerage and advisory firms, says David Bellaire, general counsel and director of government affairs for the Financial Services Institute, an advocacy organization for independent broker-dealers and financial advisors. Higher costs could push firms to raise client account minimums, which would make it harder for middle-income investors to find financial advisors, he says.

Questions About Taxes

Tax issues are a moving target for presidential candidates, particularly as lawmakers continue to work out the proposed financial-industry bailout. Funding the bailout likely would increase the national debt, which could lead to higher taxes regardless of who becomes president.

Sen. Barack Obama, D-Ill., would raise taxes on couples who earn more than $250,000, while Sen. John McCain, R-Ariz., wants to leave current tax breaks for high-income individuals in place.

No matter who wins the White House, tax rates on ordinary income, capital gains and qualified dividends will rise after 2010 unless Congress steps in to extend the Bush tax cuts of 2001 and 2003, according to the Tax Policy Center in Washington, D.C.

Capital gains, now taxed at the top rate of 15%, are also ripe for review. Many advisors say higher rates are likely, either because Obama makes the top rate 20% for those over his income threshold, or because McCain compromises with a Democratic Congress. In fact, some wealth managers are now telling clients to expect capital gains rates to rise in the next six to eight months and to act accordingly.

Both candidate support limits on the number of households subject to the alternative minimum tax.

Tim Kochis, chief executive of Aspiriant, a wealth management firm in San Francisco, says the lack of certainty surrounding taxes rates makes planning more challenging.

"It affects so much of what we do" Kochis says. "If we had some clarity and permanence, it would be better than what we have now."

The Arbitration Debate

Election results could be critical to the future of the Arbitration Fairness Act - legislation that would nullify mandatory pre-dispute arbitration agreements governing a variety of relationships between consumers and businesses. Brokerage firms typically require clients to sign the agreements as a condition of opening accounts.

If the legislation passes, financial advisors may need to defend claims brought by some investors in court, instead of before a Finra arbitration panel. The legislation has taken a backseat to election-year politics, but securities attorneys and industry groups expect the issue to heat up again in 2009.

Laurence Schultz, president of the Public Investors Arbitration Bar Association, which supports the legislation, describes it as the "most important" issue to the organization for 2009. Sifma, however, opposes the legislation, citing arbitration as a fair, quick and inexpensive alternative to using the court system.

Mark Dobin, a Florida-based securities attorney who represents both investors and firms in arbitrations, doesn't expect a positive outcome if the legislation ultimately passes. Hefty discovery costs and lengthy appeals for both sides are just some issues that may arise if investors choose to bring their claims in court. Some cases may not ultimately be heard.

"I've seen a number of cases that would not have survived a courtroom motion to dismiss that some arbitrators are willing to hear," he says.

(Suzanne Barlyn writes Compliance Watch, a column that focuses on compliance and regulatory issues affecting financial advisors. She can be reached at 201-938-4546 or by email at Kristen McNamara writes Practice Management, a column that looks at ways financial advisors can build and improve their business. She can be reached at 201-938-5392 or by email at

(Arden Dale contributed to this report)