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October 28, 2022 at 10:10 AM
What You Need to Know
- Executives at several advisory and fintech firms criticized the new proposed rule by the SEC to prohibit RIAs from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.
- Some saw the due diligence requirements as too onerous for advisors.
- If the proposed rule is implemented, advisers may also be faced with increased costs.
Executives at several advisory and fintech firms on Thursday criticized the new proposed rule by the Securities and Exchange Commission that would impose new due diligence requirements on RIAs seeking certain third-party services.
While a few of them viewed the proposed requirements as onerous, two of them called the proposed rule entirely unnecessary.
“This new rule largely impacts how advisors choose [turnkey asset management platform] partners, though some may apply it to technology partners as well,” Riskalyze CEO Aaron Klein told ThinkAdvisor by email.
“Through that lens, it might even benefit market-leading solutions like Riskalyze,” he conceded.
“That said, this appears to be a solution in search of a problem,” Klein said. “As Commissioner Hester Peirce noted, fiduciary advisors already have a responsibility to their clients that cannot be outsourced and supersedes this rule.
“The most precious thing to an advisor is their client relationships, and I’ve never seen advisors approach decisions with greater care and diligence than who they might pick as their technology and outsourcing partners. It’s too bad we’re layering on micromanaging rules when the fiduciary principle is already accomplishing the objective.”
Although Commonwealth Financial Network was “still reviewing the SEC’s proposal,” Paul Tolley, the firm’s chief compliance officer, said his company has “maintained a comprehensive initial and ongoing due diligence process of its service providers for years.”
Tolley added: “In fact, we have always viewed our due diligence processes as a differentiator in the marketplace and a critical value-add for our affiliated advisors, freeing them up to focus on serving the needs of their clients.”
He explained that “due diligence, done right, requires the dedication of substantial financial resources and the employment of subject matter experts who are well versed in a variety of disciplines, including enterprise risk management, legal, compliance, information security, privacy, accounting, data management and much more.”
Because of that, Tolley said: “The considerable resources and subject matter expertise that will be necessary for smaller or less-sophisticated investment advisers to comply with this rule will likely present significant resource and compliance challenges for many firms.”
James Haynes, Wealth Enhancement Group director of compliance, was also critical of the rule.
“While we support the goal of protecting investors, we don’t see any particular positives in this proposed rule,” Haynes said.
The SEC’s proposed rule “prescribes inflexible due diligence requirements without regard for the disparate impact on smaller advisers,” Haynes said.
“Meeting these prescriptive regulations in addition to an already burdensome regulatory framework may be infeasible for many smaller advisers,” he added. “In my view, the ever-increasing resources needed to ensure compliance with securities regulations crowds out smaller advisers and serves to hasten the continued consolidation of the RIA industry.”
Orion Advisor Solutions was also still reviewing the SEC proposal in detail, Kylee Beach, that firm’s general counsel, pointed out. Her firm will “support our advisor clients as they work to understand the rule [and we] will continue to review the proposed rule and monitor its progression as it advances through the process,” she told ThinkAdvisor.
