In a small corner of the debate over regulation of financial services stands the registered investment advisor (RIA) firm. The SEC, and RIA firms alike, acknowledge that the amount of oversight on RIA firms is inadequate. In its “Study on Enhancing Investment Adviser Examinations,” released in January, the SEC said the average exam interval for routine exams is now 11 years—up from seven years in 2009.
The broker-dealer (BD) lobby is using that as part of its push to crush another SEC recommendation, extension of the fiduciary standard of care to brokers who provide advice to investors. But a recent study conducted by AdvisorOne and fi360 indicated that the majority of brokers and RIAs in the field, 67.3%, believed that a “uniform fiduciary standard for brokers and advisors would help regain investors’ confidence.” Moreover, 58% say they “already have a fiduciary relationship with their clients.”
There is a big disconnect between what many BD executives are saying through their lobbyists in Washington—keep the status quo and preserve the “business model”—and the standard of care with which the majority of brokers in practice want to treat their clients.
It should be noted that, even with the lack of oversight on RIA firms, there were still fewer investor complaints arising from investment advisors than from brokers. One reason for that, in my opinion, is because RIAs, unlike brokers, must by law have a fiduciary relationship with their clients, always putting client’s interests first, controlling and disclosing the total costs to the client, acting prudently and with due care, avoiding conflicts of interest and managing unavoidable conflicts in the investors’ favor.
Brokers, who operate under a suitability or sales standard, are required to have a fiduciary duty to their firm, putting their firm’s interests first, not clients’ interests, and so the firm creates a fundamental conflict of interest that brokers must violate if they want to put client’s interests first. Suitability may work on a sales-only basis, when clients fully understand that it is a sales relationship but not when advice is part of the equation. Most investors do not understand that it is a sales transactionwhen they receive advice from a broker, especially when titles include words such as “advisor, counselor or consultant.” As many readers know, I am a member of The Committee for the Fiduciary Standard, a group that advocates for extension of fiduciary duty to all who provide advice to individual investors.
RIA’s Prefer Oversight by SEC
The AdvisorOne Top Wealth Managers Quarterly Pulse Survey, Q4 2010, asked participants, which are all RIA firms, to rank the three recommendations the SEC made to close the oversight gap for RIA firms.
SEC staff made these recommendations to Congress:
"(1) Authorize the Commission to impose user fees on SEC-registered investment advisers to fund their examinations by OCIE;
(2) Authorize one or more SROs to examine, subject to SEC oversight, all SEC-registered investment advisers; or