As Dually Registered Advisors’ Assets Grow, SEC Zeros In

SEC exam chief di Florio says the agency is uncovering ‘a lot of challenging issues’ with dually registered advisors

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  • 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.
  • Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isn’t just a recommended best practice— it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firm’s strategy is proprietary.

Just as the Securities and Exchange Commission beefs up its oversight of dually registered advisors, new research from Cerulli Associates finds the dually registered channel is one of the fastest growing.

RIAs and dually registered advisors are the fastest growing channels, with assets under management increasing by 13% and 19%, respectively, Cerulli said Friday.

“With the asset management industry inching forward, advisor transitions, investor choice and organic growth have favored the RIA and dually registered channels,” said Tyler Cloherty, associate director at Cerulli, in a statement. “As advisors move into the RIA and dually registered channels, many new entrants will be progressively smaller, but this is contributing to significant growth within the channels.”

But Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations, said at the Investment Adviser Association’s compliance conference in Arlington, Va., on Thursday that SEC examiners are uncovering “a lot of challenging issues” with dually registered advisors.

The SEC listed dually registered advisors as an “emerging risk" in its exam priorities for this year.

Due to the continued convergence in the investment advisor and broker-dealer industry, the SEC said that examiners would “continue to expand coordinated and joint examinations with the BD Program of dually registered firms and distinct broker-dealer and investment advisory businesses that share common financial professionals.”

For example, the SEC said that it was not uncommon for a financial professional to conduct brokerage business through a registered broker-dealer that she does not own or control and to conduct investment advisory business through a registered investment advisor that she owns and controls, but that is not overseen by the broker-dealer. This business model, the agency said, “presents multiple conflicts.”

Cerulli notes that in addition to providing growth of assets by channel, its The State of the U.S. Retail and Institutional Asset Management 2012 report also provides in-depth analysis of the dynamics in the retail and institutional channels, and analysis of the preferred investment vehicles in these markets.

“Advisors are migrating into the RIA channel either by starting their own practice or joining existing firms,” Cloherty says. “While wirehouse asset market share may be on a decline, assets per advisor there remain the strongest in the industry. Advisors within wirehouses manage nearly double the assets of their competitors in the dually registered and RIA segment.”

Cloherty went on to say that “wirehouses are raising the cost of doing business through higher platform fees and more expensive revenue-sharing agreements, which asset managers are willing to pay. At the same time, this is leading some managers to increase their focus on the RIA market due to the lower cost of doing business in the space. However, the sheer size of the wirehouse channel means it will remain a primary target for asset managers.”

In its report, Cerulli predicts that assets will remain concentrated among wirehouse advisors. However, “the number of advisors in this channel will continue to dwindle, which will force asset managers to reorganize their wholesaling teams to include coverage of the RIA channel.”

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