More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
Total assets managed by investment advisors shrank for the first time since 2003, but despite a nearly 20% drop in assets, the number of SEC-registered investment advisors increased by 2% to 11,257, according to the ninth annual Evolution/Revolution report, which was released on October 2 and is jointly conducted by The Investment Adviser Association (IAA) and National Regulatory Services (NRS). Total assets under management (AUM) reported by all firms "dropped precipitously to $34 trillion after reaching an all-time high of $42.3 trillion the previous year," the report found.
The report is based on fiscal year-end data that RIAs must file electronically with the Securities and Exchange Commission (SEC). The report notes that as reported in previous Evolution/Revolution reports, assets under management are highly concentrated with a small number of very large firms. "Four percent of SEC-registered investment advisors manage more than 80% of the total assets. Small businesses (those that employ fewer than 50 employees) make up the bulk of the SEC-registered investment advisory universe at 90%," the report states.
David Tittsworth, executive director of the IAA, noted in releasing the report that "the vast majority of advisory firms experienced significant declines in assets under management as a result of the financial crisis of 2008." However, he continued, "the investment advisory profession continues to be resilient and we expect that assets will increase as the markets rebound. As the current regulatory reform debate moves forward, we believe it is critical for policy makers to be mindful of the broad diversity of investment advisory firms, including the predominance of small businesses."
Tittsworth is set to testify before the House Financial Services Committee October 6 financial services reform hearing entitled, "Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance Office." Tittsworth will testify about regulatory reform issues that would directly affect all investment advisory firms, including provisions of the Treasury Department's draft Investor Protection Act relating to fiduciary obligations for brokers and investment advisors, as well as issues related to SEC resources, including whether a self-regulatory organization for investment advisors should be established.
The Evolution/Revolution report also found that the number of investment advisors that manage at least one hedge fund declined in the past year to 1,747 from 1,868 and these hedge fund advisors reported $14.3 trillion in AUM. "Given the on-again, off-again registration requirements for advisors to hedge funds and the various proposed legislative initiatives that would restore the registration requirement and offer some transparency into the operations of hedge fund advisors, these trends give little insight into this niche of the profession," the report states. "Nonetheless, the data suggest that this market segment was disproportionately impacted by the economic decline."
John Gebauer, managing director at NRS, stated that the findings of the report "reinforce and amplify what we've seen and heard from our clients in the past year. Given that the primary form or compensation for advisors is a percent of AUM, many small businesses have been faced with revenue declines of 20% in the fourth quarter of 2008 and another 20% in the first quarter of 2009. Undoubtedly, many small advisors closed up shop, but the vast majority of them remain committed to their clients and the advisory business model."