The lightly regulated registered investment advisor industry may offer few protections for investors who wind up with incompetent advisors.
RIA registration "is just notifying regulators that you are holding yourself out as a professional investment advisor, and that doesn't necessarily mean that you're good, or ethical, or competent," said Sheryl Garrett, founder of Garrett Planning Network Inc. in Shawnee Mission, Kan., a network of fee-only financial planners.
Inappropriate investments, high fees and an inability to collect on legal awards are some of the problems investors may face with registered investment advisors, according to attorneys such as Angela Magary, a Boston securities lawyer, who have represented clients in arbitration or court actions against their advisors.
There are more than 14,000 independent RIA firms, which typically manage investments for individuals and may also provide related financial planning services, controlling about $1.5 trillion of assets, according to Aite Group.
The industry gained new attention in January, when the Securities and Exchange Commission recommended that traditional brokers should be held to the same fiduciary standard that applies to RIAs. "The RIA business has gotten a big reputational boost in the last year," because of a heightened focus on its fiduciary status, said Andrew Stoltmann, a Chicago securities lawyer.
There are no industrywide figures available for customer complaints against their RIAs. More than one in 10 RIAs report they have been the subject of a disciplinary action, according to a study by the Sunlight Foundation, a nonprofit in D.C. that advocates for open government. Such actions may include being convicted of a felony or making false statements to regulators.
Customer complaints for the RIA industry don't go through a single centralized entity and may be resolved informally between an investor and a firm, through arbitration, or through court action. The SEC, which generally investigates possible violations of securities law, does not track aggregate fines against the industry.
Most investment advisors serve their clients well, said David Tittsworth, executive director of the Investment Adviser Association, a lobbying group for SEC-registered advisors. "I don't think there's a silver bullet, but I think the model of fiduciary duty and disclosure of conflicts of interest is a very good model."
Advisors are not required to disclose their performance history to prospective clients, said Ted Laurenson, a New York partner at McDermott Will & Emery. "Most advisors are going to say, 'We customize the portfolio to you, so we don't have a composite of returns to show you,' " said Kristi Kuechler, former president of the Institute for Private Investors, a membership group of high-net-worth investors. Some use that line to evade a request for performance history, she said.
When investors do run into problems with an RIA, they often decide to accept losses rather than face expensive, protracted legal action, said Laura Corsell, a partner with Montgomery, McCracken, Walker & Rhoads in Philadelphia.
The costs are "an enormous deterrent," said C. Thomas Mason, a securities and employee benefits lawyer in Tucson, Ariz. Standard initial filing fees for the American Arbitration Association range from $775 to $8,200 on claims of up to $5 million, and subsequent fees can top $70,000, depending upon complexity, length and the arbitrator's hourly rate, Mason said.
Ordinary brokers must meet capital requirements based on the size of their business and on the amount and type of trading they conduct, according to the SEC.
"If a large brokerage firm defrauds you, at least they have the money to pay you back," said Brian Smiley, a securities lawyer in Atlanta.
There are no net capital requirements for SEC-registered advisors, said Robert Plaze, associate director for regulation of the division of investment management for the SEC. "If a broker doesn't pay a Finra arbitration award, they get their registration suspended," said Jane Stafford, a securities lawyer in Kansas City, Mo. If advisors don't pay, they "may have to disclose that they have an unsatisfied judgment against them, but no one's going to shut them down."
