Investors whose money is managed by a “registered investment advisor” should not be too comfortable with that designation or the fact that their advisor may be bound by a fiduciary duty, according to Elizabeth Ody’s Bloomberg article entitled “RIAs Offer Little Investor Protection Beyond Fiduciary Label.”
The risks of using registered investment advisors can include the following:
If the misconduct of a registered investment advisor results in losses to investors, the advisor may not have adequate resources to repay victims.
The “registration” of an investment advisor is just a notice filing with a regulator, and does not mean that the filer is either honest or competent. Barriers to entry are low. Regulators do not screen entrants for competence or ethical standards.
Registered investment advisors with less than $25 million under management are not regulated by the Securities and Exchange Commission, and may be only lightly regulated by the states in which they do business. The SEC cut off will increase to $100 million under management next year. Thus, many smaller registered investment advisors effectively fly below the regulatory radar.
While broker dealers are supposed to supervise associated registered investment advisors, that does not always happen. Large broker dealers may find it hard to supervise 18,000 brokers as fiduciaries. Although a registered investment advisor may be associated with a smaller broker-dealer, their offices may be far apart such that the broker-dealer may not be in a practical position to supervise the registered investment advisor.
When problems arise, doing something about it may be too costly. Registered investment advisors often have arbitration clauses in their client agreements that specify the American Arbitration Association (AAA) or JAMS as the forum. The costs imposed by those organizations ? with filing fees from $775 to $8,200 on claims up to $5 million, and subsequent costs that top $70,000 ? act as a deterrent to filing a claim directly against the registered investment advisor. Most claims are filed through the Financial Industry Regulatory Authority (FINRA) against an associated broker-dealer for failure to supervise, because of the lower cost and the relative ease of collection of a FINRA arbitration award.
Cases against registered investment advisors that are not also FINRA registered broker-dealers must be filed in court or in an arbitration forum other than FINRA, such as the AAA or JAMS. Collection of an award rendered by a court or AAA or JAMS can be costly and problematic compared with a FINRA award, because FINRA holds the broker-dealer’s license, and can revoke or suspend it if it fails to pay an award.
Charging fees based on a percentage of assets under management creates a potential conflict of interest in that it may encourage the adviser to concentrate clients in higher-fee or higher-risk investments.
Prior to investing, investors should check for a disciplinary record with the SEC and state regulators. Investors should specifically run a search on http://www.adviserinfo.sec.gov and http://www.finra.org/Investors/ToolsCalculators/BrokerCheck. Individual state regulators may have additional information. Contact information for state regulators can be found at http://www.nasaa.org/quicklinks/contactyourregulator.cfm.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in investment litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving registered investment advisors. For further information, please contact us.