Posts

RIAs take advantage of lax rules

Susan Axelrod: more brokers are migrating to the RIA landscape where regulatory requirements are relaxed

Susan Axelrod, executive vice president of regulatory operations for Financial Industry Regulatory Authority, Inc. say’s she recognizes some brokers are opting out of the brokerage business and moving toward RIA licensing to avoid the stress and burden of frequent exams.

RIAs take advantage of lax rules

Brokers feeling buried under reporting requirements for examinations and personal activity questionnaires are overwhelmed by costs to maintain a compliance department for regulatory compliance.  As more and more firms find exams time-consuming and stressful, it stands to reason that some would breakaway and join the RIA channel.

A concern is whether investors are at a higher risk because of the lax RIA regulatory landscape.  Given the influx of new entrants  simply to avoid regulatory reporting, there should be cause for concern. Certainly, investors can be well-served in either channel, but the fact is, the SEC examines RIA’s under their jurisdiction on average only once every 10 years. SEC Commissioner Daniel Gallagher recognizes there are more advisers in the RIA landscape violating the law than are being caught. In a speech earlier this year he indicated; “we’re just not finding them quickly.”

So an easy solution would seem to be to increase the number of exams for RIA’s. However, implementing this practice is costly and the SEC has yet to convince Congress to authorize additional funds for management.  As an alternative a self funded third party management idea has been tossed about.  One: allow a third-party to manage the exams of RIA’s; and two: implement fee based exams where RIA’s pay to have the exams done. Again, implementing any new plan could take a few years to develop.

Meanwhile, many feel the America public has waited too long for the government to fix the problem. It’s time to start working on a solution and not just bandying ideas about.

What do you think, should exams for RIA’s be just as frequent as they are for brokers?

 

RIA’s vs Broker-Dealer  what’s the difference?

Fiduciary Responsibility vs. Suitability Rule

RIA’s are subject to Fiduciary Responsibility. They must put client interests above own and declare any conflicts of interest.

Brokers are subject to Suitability Rules.  FINRA’s suitability rule states that firms and their associated persons “must have a reasonable basis to believe” that a transaction or investment strategy involving securities that they recommend is suitable for the customer.

 

Commissions vs Fees

RIA’s are paid an advisory fee directly from the client for advice and service, usually a percent of assets under their care, but sometimes a fixed fee. 

Brokers are paid commission based on investment transactions made on your behalf. 

 

Disclosure Rules

RIA’s provide clients with quarterly reports showing the change in portfolio value and fees charged.

Brokers must follow rules for legal disclosures, by providing prospectus booklets and required documents.

 

Relationship

RIA’s work closely with clients; helping to manage their assets. They typically charge based on a percentage of the assets they manage and maintain transparency in dealings to avoid conflicts of interest.

Broker-dealers facilitate investment transactions. They receive a commission based on investment transactions. They  generally cost less in fees and the relationship is well-suited for savvy investors who research and oversee their own investments.

Read more news about regulatory compliance standards for RIA’s and Brokers. 

Join us for “FINOPS Guide to PCOB Audits” Free Webinar

White Paper:Exemption from Registering with the SEC as a Broker Dealer

On January 31, 2014, the SEC’s Division of Trading and Markets issued a “no action” letter, in which the Division will not recommend enforcement if a M&A broker were to effect securities transactions in connection with the transfer of ownership of a privately held company under certain conditions.

History:  There is no nationally recognized license specifically for merger and acquisition (“M&A”) or business broker services. Accordingly, most practitioners have relied upon state real estate broker licenses for their transaction activities. Most states require a realty license to sell a business property, and some states stipulate that a broker must hold a realty license to sell a business. Therefore, over time, the real estate broker license became the defacto license for this niche service.  However due to the vagaries of different state laws, M&B brokers operating a transaction that cross state lines were subject to various state based requirements. In California, a broker dealer registration is not required (Rule 260.204.5) in connection with mergers, consolidations or purchase of corporate assets, and who does not receive, transmit, or hold for customers any funds or securities in connection with such transactions.

 

Read more