More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
David Tittsworth may have been quoted in a recent Bloomberg piece critical of independent advisors, but he isn’t happy with the conclusions drawn. Tittsworth (left), executive director of the Investment Adviser Association, a Washington, D.C.-based nonprofit organization that “exclusively represents the interests of SEC-registered investment advisor firms,” is taking issue with the overall theme of the article, as well as specific quotes it contains.
The article, which appeared on Bloomberg’s website Wednesday, begins with a (legitimate) tale of woe.
“Arnold and Cheryl Levy were a year away from retiring when Jeffrey Liskov, acting as their registered investment adviser, took a large position during July 2009 in a speculative fund with Arnold’s retirement money,” according to the piece. “According to court filings they lost about $85,000 on the ProShares UltraShort MSCI Emerging Markets (EEV) exchange-traded fund, which placed bets that foreign stocks would drop.”
The Levys claim in legal filings they lost about $149,000 on positions taken by their advisor, including the exchange-traded fund.
The story goes on to say Liskov was sliding toward bankruptcy, and the couple had to absorb a 44% loss on the fund. Liskov responded by saying he alerted the Levys to the initial purchase of the fund in a voicemail in July 2009, he said in court filings, and they were aware of the fund’s risks.
The piece notes registered investment advisers are billed as an alternative to traditional brokers because they are legally bound to a fiduciary duty to put their clients’ interests first, and typically charge fees instead of commissions.
“In practice, the lightly regulated RIA industry—where low barriers to entry helped swell membership by 39% in six years—may offer few protections for investors who wind up with incompetent [advisors],” Bloomberg reports.
“I think it’s unfortunate that people try to make the case that brokers are good and advisors are bad, and vice-versa,” Tittsworth responded in an interview. “I especially take issue with this idea that RIAs are lightly regulated. Ask any [chief compliance officer] if they think they’re lightly regulated. The amount and complexity of the regulatory scheme for advisors has increased dramatically in recent years.”
He admits there is an issue with the SEC and resources, adding that “where it all will end up is yet to be seen.” However, there is a “principles-based fiduciary duty with broad, anti-fraud regulations,” to which RIAs are subjected, Tittsworth says.
“I don’t know of any advisors that are breaking away to go independent because the regulatory oversight is somehow less. Although, there is no box on Form ADV to check to indicate that,” he adds.
While Tittsworth notes individuals states and the federal government have strong anti-fraud measures in place, “no one has yet found the regulatory silver bullet that will effectively regulate every single advisor or broker. If they did, we’d all be following that model now.”
The Bloomberg article’s claim that the amount of advisors joining independent ranks has increased 39% in six years is not sourced, although Tittsworth says the figure tracks with SEC data that found registered advisors numbered 8,302 in 2004 and 11,643 in 2010.
“Quick math finds that increase to be roughly 40%,” Tittsworth says. “That’s where [Bloomberg] most likely got that figure.”
No ‘Bernie Madoff’ Exam
Registering as an RIA “is just notifying regulators that you are holding yourself out as a professional investment [advisor], and that doesn’t necessarily mean that you’re good or ethical or competent,” Sheryl Garrett, founder of Shawnee Mission, Kan.-based Garrett Planning Network told Bloomberg.
“I absolutely, 100% agree,” Tittsworth responds. “And by just passing the bar exam, that doesn’t guarantee I’m an ethical and honest person. Bernie Madoff has a Series 7 licensing exam; did that somehow guarantee he was an honest and ethical person?”
Tittsworth takes issue with two specific quotes in the article, both of which he says are misleading. The first is attributed to C. Thomas Mason, a securities and employee benefits lawyer in Tucson, Ariz.
“Many [advisors] include arbitration clauses in their agreements with clients that require customers to bring any complaints through either the American Arbitration Association or JAMS private arbitration,” Mason says. “The costs are an enormous deterrent.”
Tittsworth responds by saying arbitration, to his knowledge, is not a prevalent practice in the advisor industry, although he admits he has no statistics on which to base his claim.
“It is mandatory in the broker-dealer industry, and most broker-dealers have an arbitration clause included in their client paperwork,” he adds. “But in my 14 or 15 years here, I haven’t seen it. That’s not to say that there are not any RIAs that have an arbitration clause, it’s just not as prevalent as the article leads readers to believe.”
He points to the next paragraph, in which Brian Hamburger, founder of MarketCounsel, a firm that advises RIAs and brokers on compliance, says, “More than 90% of the complaints we see are against brokers and broker-dealers” rather than against advisors. Tittsworth says he wonders why this quote is not the headline, or at least not further up in the story.
The second misleading point, Tittsworth feels, is the article’s explanation of the capital requirements brokers must meet.
“If a large brokerage firm defrauds you, at least they have the money to pay you back,” Brian Smiley, an Atlanta-based securities lawyer, told Bloomberg.
There are no net capital requirements for SEC-registered advisors, added Robert Plaze, associate director for regulation of the division of investment management for the SEC.
“Yes, there are capital requirements that brokers have to meet,” Tittsworth acknowledges. “But a very important distinction left unmentioned is that brokers have actual custody of the assets, so they can take the money and run. Advisors custody the assets with a third party, and don’t have that direct level of control. It doesn’t mean there won’t be any problems, but this makes it far less likely problems will occur.”
Bloomberg's article concludes with quoting Susan John, a Wolfeboro, N.H.-based advisor and chair of the National Association of Personal Financial Advisors.
“At the end of the day, whether a person is a broker or whether they’re an RIA, I think that 99% of us really want to do the right thing by our clients,” John said. “Of course, there’s always that 1%.”
That, Tittsworth says, he absolutely agrees with, and reiterates that pitting brokers against advisors is a disservice to all.
“We just haven’t found that regulatory silver bullet to make sure every advisor and broker is doing the right thing for their client,” he says.