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Advisors Prefer SEC for RIA Oversight

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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

(3) Authorize FINRA to examine dual registrants for compliance with the Advisers Act. " 

More than 40% of Top Wealth Managers participating in the Q4 survey would prefer to pay a fee to the SEC to have OCIE examine RIA firms.

Just over 31% of those participating in the survey said they would rather have “one or more SROs,” to oversee RIA regulation.

Finally, over 28% said they would rather see Congress “Authorize FINRA to examine dual registrants—BD-RIAs."

FINRA, the BD self-regulator, has stepped up to say it would like regulate all RIA firms, not only BDs and not just dually-registered BD-RIAs. There is logic in why FINRA would want oversight of an entire BD-RIA firm if it is dually registered, but not in FINRA regulating independent RIA firms.

It is important to point out that having FINRA oversee all independent RIAs was not one of the SEC staff’s recommendations to Congress. Rather, they recommended that FINRA oversee the dual-registrant BD-RIAs.

So far, however, there is only one other group that has stepped forward to ask for authorization to be an SRO for independent RIAs, and that is SROIIA, the Self-Regulatory Organization for Independent Investment Advisors. That’s the fledgling group led by a group of law students of University of Mississippi School of Law and professor and investor advocate Mercer Bullard.

It remains to be seen whether Congress will appropriate enough funding for the SEC to truly live up to its mandate as an investor protection organization—funding which the SEC earns through fees from financial industry participants, not from taxes, by the way, and out of which, in some years the Congress withholds hundreds of millions of dollars that could be going to fund SEC programs that would help to protect your clients, and restore confidence in America.

Will Congress vote to protect and educate investors by mandating a strong SEC, or protect the very firms that caused the financial crisis—for which we all are still paying? It's not too late for you to let Congress know your opinion.