What does the next decade hold for the financial-services sector?

While some regulatory changes are underfoot there are a handful of bills wending their way through Congress it is uncertain which, if any, will pass. It s really a question of degree, says Charles Rotblut, vice president of the American Association of Individual Investors. A stronger-than-expected recovery will definitely hurt the chances of reform passing, says Rotblut. It s also an election year, and a lot of senators are going to be thinking about what will get them elected not so much what s good for the country and that will make it more difficult to pass any meaningful regulation.

Here are seven possible changes.

Lower Commission on Investment Products

Investors should expect commissions on investment products to drop, says Sheryl Garrett, a certified financial planner. This will occur as brokerage firms increasingly compete for more investors, and they ll lower their commissions in order to attract and retain them.

In addition, government calls for more transparency with investment products could push commissions further down, she says. During the last 10 years, the industry produced new ways of packaging stocks and bonds and selling them often with an insurance wrapper that had a built-in profit margin. Should increased transparency become law, financial-services firms will have to inform investors of a fund s packaging and its commissions.

There s a lot of evolution going on in the investment world, she says. Individual investors are recognizing that you don t have to pay 1% to 3% expenses on a mutual fund to obtain exposure to the stock market.

Fiduciary Responsibility as a Law

On Dec. 11, the House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, which seeks to revamp the financial sector. Among the proposed changes, the government would direct the Securities and Exchange Commission to set rules of fiduciary standard of conduct when a broker or dealer provides personalized investment advice to a retail customer.

Currently brokers or dealers have to give clients reasonable recommendations, and if an investment goes wrong, the investor must prove that he or she was given unsuitable advice. A fiduciary standard goes several steps further since the broker would have to explain an investment s risks and expenses, and it s the broker s responsibility to prove that their advice was appropriate and reasonably expected to be the best recommendation for the client, says Garrett, the financial planner.

Such a change would be welcomed news for most investors. It s going to raise the bar for the recipients of financial advice that they can rely that advice is by law -- not just in words -- delivered in their best interest, she says.

Garrett expects that Congress will pass legislation that will include the fiduciary clause within the first half of 2010 and that it could go into effect as early as 2011.

A New Regulatory Body

The same legislation includes reforms for more oversight of large financial institutions and possibly tighter control on U.S. capital markets. It also included a provision that would give FINRA, the largest independent securities regulator in the U.S., the power to inspect and regulate broker-dealer investment advisors, but that was removed from the bill on Dec. 11.

Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, later said that Congress would determine how the SEC can use FINRA s resources. Diane Pearson, an advisor at Legend Financial, a fee-only investment advisory firm, says it s likely that the government will combine the SEC and FINRA into one regulatory body, and that this could occur as soon as 2010.

Right now, both FINRA and SEC have black eyes, and especially because of the Madoff case, the thought process is if those two pieces aren t working [the government is thinking to] create something brand new, she says. Should this occur investors can be more certain that their money isn t being mismanaged or in a Ponzi scheme. However, Pearson says that many investment advisory firms would shut down because they would be unable to pay for the regulatory issues that they d be required to meet, including increased audits.

Increased Consolidation

Increased regulations will likely lead to more consolidations among investment advisory firms, which would leave fewer options for investors to shop around.

Some firms will merge with larger firms that can afford to pay for regulatory issues, says Pearson. Another reason for consolidation will be a lower-return environment going forward. In an industry where revenues and returns are directly linked, some firms won t be able to continue on their own as asset values drop.

Limits on Discretionary Trading

Congress is also pondering the idea of eliminating discretionary trading, which is when a limited power-of-attorney is given to an investment advisor to execute trades on behalf of their clients. Such a decision would be made to give the investor the right to approve a trade before it s made.

While it could help to further eliminate mismanagement of one s investments, it could make investors lose out on market gains. More than two decades ago, investment advisory firms required that their clients fill out an application and mail in a check (when applicable) before a trade was made. Returning to such an environment will really turn our industry upside down, says Pearson. The world doesn t move that slow anymore. Look at the volatility we ve seen in the market in the past three years; if we can t move and react quickly, how are we going to service our clients?

Investors who want more control over their own investments can sign up on online brokerage web sites like TD Ameritrade or Charles Schwab.

More Competition among Ratings Agencies

Going forward, it s likely that investors will see major changes in the way bonds and corporate debt are rated, says Rotblut.

Expect more rating agencies to pop up as a result of popular investor sentiment that the predominant ratings agencies failed to recognize the risks and lack of sustainability of subprime mortgages and certain financial institutions.

As a result, there will be a greater assortment of research available to investors. But it also does have the potential to create more confusion simply because there are more opinions about the same securities out there, says Rotblut of the American Association of Individual Investors.

A New Transaction Tax

Earlier this month, Rep. Peter DeFazio (D., Ore.) and others in the House introduced a bill, Let Wall Street Pay for the Restoration of Main Street Act, that seeks to impose a tax of around 25 basis points on securities and derivatives transactions.

The burden of paying the tax would fall on investors. Also, a transaction tax would make most high-frequency trades unprofitable. This could lead to a scenario where traders realize it s easier to conduct transactions overseas than in the U.S., and trading volumes will drop here, and that will make it harder for investors to get in and out of investments, says Rotblut.