What is FINRA? Why Does it Matter to Real Estate Investors?

[Nicholas Varner]

The acronym FINRA stands for Financial Industry Regulation Authority. On its website it describes its mission and utility.

"FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry. FINRA is not part of the government. We’re an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly."

Authorized by congress to protect market integrity and provide efficient regulation of the securities industry, but not part of the government? How does that work? Who funds FINRA? What is their role in the Financial Services industry?

FINRA presents itself as protecting and educating investors in the Financial Services space. It is listed as a corporation that is also a Self Regulatory Organization (SRO). Officially, it ultimately reports into the SEC so what is its role? In my research I found the following roles:

• FINRA regulates trading in equities, corporate bonds, securities futures, and options.
• As part of its regulatory authority FINRA periodically conducts regulatory exams of its regulated institutions.
• FINRA licenses individuals and admits firms to the industry, writes rules to govern their behavior, examines them for regulatory compliance, and is sanctioned by the U.S. Securities and Exchange Commission (SEC) to discipline registered representatives and member firms that fail to comply with federal securities laws and FINRA's rules and regulations.

The Financial Services Industry funds FINRA to investigate and regulate itself. Legislation was introduced in Congress to require Financial Advisors to put their clients' interests first. Shockingly, this has not been the case. Financial Advisors are not required to put their clients' interests first. Financial Advisors have a fiduciary duty, currently, to place investors into appropriate risk funds. Specifically, this new piece of legislature was targeting retirement and 401K accounts. FINRA had stated that Financial Advisors had a fiduciary duty to clients to just place them into appropriate risk profile funds, not necessarily the fiduciary responsibility to place their clients' interests first. FINRA actively lobbied against this bill to place client's interest first as the standard of a Financial Advisor's fiduciary duties. Here's one story: Fiduciary Obligations

As real estate investors this is really a result that we already know to be true: the Financial Services industry is not going to put clients' interests first, they will put their own interests first and fight to keep it that way. In FINRA's opening mission statement on its website it says, "FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry." That seems like a very difficult claim to make when you are a Self Regulated Organization that fights against placing the highest fiduciary duty to investors.

The question whether you are investing in Real Estate, Fixed Assets, or Equities becomes, "I have my motivation for investing, but what are my service provider's motivations?" Are their interests mutually aligned with your interests? Ask service providers including: Financial Advisors, Real Estate Agents, Brokers, Property Managers, Contractors, the following question: How are you motivated to help me succeed? If they don't have a satisfactory answer, move on. After you do a deal, what is the level of service that they are going to offer you? Is it just about making sales? Do they just want you to buy their funds, homes, etc? What are your risks if my portfolio that you advise me to buy performs poorly? Are fiduciaries really listening to you? Are they looking for the best opportunities for you?