Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg

According to, the registered investment adviser industry may offer little protection to investors who end up with an incompetent adviser. This, even though investment advisers, unlike brokers, are upheld to a fiduciary standard to make their clients’ interests a priority and charge fees rather than commissions.

With over 14,000 independent RIA firms controlling about $1.5 trillion of assets (says Aite Group), this is important for investors to know. Problems they could face include too high fees, inappropriate investments, and a hard time collecting on legal awards. Unfortunately, many investors would rather deal with their losses rather than spend the time and money to take legal action against a negligent registered investment adviser.

Currently, advisers who manage at least $25 million have to register with the SEC. If the amount under management is less than that then they must register with the states where they do business. On June 28, 2012, however, the threshold will go up to $100 million, which means that approximately 3,200 advisers will be subject to state rather than SEC oversight.

It was just this January that the U.S. Securities and Exchange Commission recommended that traditional brokers also be upheld to the fiduciary standard that RIAs must meet. Currently, the nation’s approximately 632,000 brokers have to fulfill a suitability standard requiring them to offer advice that meets a client’s needs at the time that the sale of the product is made.

Yet even with the fiduciary standard, advisers don’t have to disclose their performance history to prospective clients. Because SEC-registered advisers don’t have to deal with net capital requirements, some of those that are ordered to pay an investor award cannot afford to and don’t. Unlike brokers, who may face suspension of their registration suspended if they don’t pay, advisers must only disclose that they have unpaid judgment.

The nonprofit firm Sunlight Foundation says that more than 1 in 10 RIAs is subject disciplinary actions, including convictions for felony crimes. Last year, the SEC took 113 enforcement actions against investment firms and investment advisers. That said, legal settlements and arbitration awards have to be disclosed on an adviser’s ADV form, which an RIA must register with the states or the SEC. Customer disputes involving investment adviser representatives can also be found on the SEC Web site.

Advisers will usually include arbitration clauses in agreements requiring clients to work through disputes through JAMS private arbitration of the American Arbitration Association. However, standard initial filing fees can start in the high hundreds and go into the thousands of dollars. Additional fees that may follow run into the tens of thousands of dollars.

Consumer Federation of America investor protection director Barbara Ropers says that because the majority of advisers don’t accept commissions, they may have less conflicts of interests than brokers. However, where there can be a conflict interest is in the charging of adviser fees (usually range from under 1% to 2%) of assets under management, which can compel an adviser to plays clients in higher-fee or –risk investments.

The SEC reports that most federally registered investment advisers charge client fees based on the percentage of assets under management (just 9% of them get commissions). Some advisers, however, may be charging fees that are too high.

Our securities fraud lawyers represent clients who have suffered losses because an investment adviser or a broker dealer was negligent.

Related Web Resources:

Safeguards Scant for U.S. Investors as Registered Advisers Increase by 39, Bloomberg, July 6, 2011
Investment Advisers Could Arbitrate Through Finra Under New Plan, The Wall Street Journal, April 11, 2011
Protect Your Money: Check Out Brokers and Investment Advisers, SEC

More Blog Posts:

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Blog, January 13, 2011 Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker Fraud Blog, January 3, 2011
Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010
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