Advisor/Adviser

Advisors who are registered representatives leaving their BDs to form stand-alone RIAs is becoming an increasingly popular business strategy.  Indeed, as the fee-based model is surely the direction in which the industry is headed, such moves can make a lot of sense (even though I would much prefer being an IAR with a good firm than taking on the risk and hassle of “being” an RIA). 

Unfortunately, many advisors who have become advisers (and thus fiduciaries) are doing so for the wrong reasons.  Many seem to think that “becoming” an RIA will mean more freedom, less compliance hassle and more money.  That’s often true, but it come with a big “but.”

It’s true that an adviser who “becomes” an RIA largely keeps his or her own counsel with respect to compliance and what is permissible and thus will see fewer roadblocks to what he or she wishes to do in the short-run.  But over the longer-term, the much stricter fiduciary standard (which I think is a good thing) and a changing regulatory environment are going to cause problems for many.

In the wake of major public embarrassments — most notably the Bernie Madoff scandal — regulators have been stepping up their enforcement efforts across the board. These efforts have focused upon the kinds of investments and investment advice that some are looking for more freedom to use by forming an RIA, such as private placements and other illiquid alternative investments.

Meanwhile, the SEC has started to take a hard look at what advisers state in their ADV filings and cracking down on half-truths and exaggerations. The Commission has also issued many more complaints and cease-and-desist orders this year than has typically been the case.  All in, the SEC filed 146 enforcement actions against investment advisers and investment companies during the 2011 fiscal year, a 30% increase from 2010. More significantly, the SEC has promised more frequent audits and ramped up enforcement in the RIA space generally.

These trends will continue in 2012. “An enforcement wave is coming,” warns Jordan Thomas, an attorney and former assistant director at the SEC’s asset management unit.  That cannot be good news for those who moved to the RIA model simply to “do what they want” and “push the envelope” with less oversight. As Thomas aptly puts it, “The world is about to change for investment advisers.” 

While I am as frustrated as anyone at the bureaucratic inefficiencies and general lack of understanding often offered by regulatory bodies, I welcome higher standards of conduct.  Simply put, our industry must do a much better job serving our clients’ interests.  Too many of us have been too focused on our own interests for far too long.  Those who have formed RIAs merely to serve their own interests can expect a rude awakening in the not too distant future.

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