Most of the financial planning profession is discussing the incredible costs associated with complying with all of the regulations our government has issued to prevent the next Madoff and Lehman Brother’s and AIG style failure. Unfortunately, the government is creating a new industry, and much harm, rather than dealing with the real problem. In Madoff’s case, routine actual audits of the books of custodians of client’s money were neglected. In the case of the 2008 meltdown, refusing to prevent “Too Big to Fail” was the start. Passing a law that exempt Credit Default Swaps from regulation due to heavy lobbying by large financial institutions was ruinous. Allowing Hedge Funds to go unregulated after recognizing their activities could adversely affect the US economy, placed Hedge Fund profits before public safety. Strangely enough, the US government is pressuring one of the groups with over regulation into possible oblivion (the small financial planning firm) which is none of the problems listed above.

In a post recently written by a colleague, Rick Kahler, of Kahler financial Group in South Dakota, he discusses the costs of complying with all these regulations. “We spend a lot of time and money complying with SEC regulations. Our compliance attorney costs around $1,000 a month. We spend $500 a month backing up all of our social media postings, emails, and our website. This is essentially to prove that on any given day we didn’t guarantee someone an investment return. Staff time and other associated expenses come to another $1,500 a month. The total is around $4,000 a month.”

“Since 2009 the government has added some 13,000 new rules. Of these, 330 were “major” economic rules. Another 739 affect small businesses. There are 3,503 more new federal regulations in the pipeline, including many contained in the Dodd-Frank bill passed in July 2010. Based on industry reports and estimates, if the SEC enacts all the provisions of Dodd-Frank, our monthly compliance expenditures will double to $8,000 a month. (This represents $72,000 a year in costs without any extra service!) “

The Financial Planner then goes on to discuss that the regulations extended to his cleaning service. Furthermore the regulations require the firm to reduce services to clients (not reducing fees) as the services subject the firm to requiring a certified public accountant to audit their accounts. The service was assisting clients with funds at other institutions such as 401(k)s etc. “As just one example, we will no longer be able to assist clients with opening, closing, or updating selected client accounts. These include 401(k)’s, annuities, bank accounts, 403(b)’s, 457′s, and 529 college funding plans…. When clients share user IDs and passwords and this access allows advisors to also take actions like transferring funds, updating addresses, or changing beneficiaries, the SEC now calls this “having custody” of those accounts. For most independent investment advisors, complying with the requirements for custodial accounts means adding a new layer of costly compliance and audit requirements. Instead, many will discontinue the services that cause accounts to be categorized as custodial. Instead of managing these accounts ourselves, we will have to limit our service to teaching clients how to do so.”

The planner stated that currently costs to comply with these regulations are running five percent of gross revenues up substantially since 2009. With the current regulatory environment those expenses are expected to double to ten percent of revenues in just a few years. This is exactly what happened with Sarbanes-Oxley. Sarbanes-Oxley failed to do the one thing it was designed to do: criminalize and punish wrongdoing in accounting and reporting.

So here we are five years after the 2008 financial crisis. The federal government has enacted legislation aimed at protecting the public and corralling evil corporate giants and just as with Sarbanes-Oxley the statutes and regulations seem to have the opposite effect. The regulations assist large corporations (the villains in 2008) and harm the small companies (the heroes of 2008). Once again, we have legislation that is harming the people of the United States, including you and me and us.