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More On RIA Regulation Changing

Pat Allen's question about my previous post about RIA regulation touches on an important issue. She wrote:

“I've been thinking that the reason Investment Advisors are more communicative on the Web is that they are not regulated by FINRA. Is that right–would you expect that a different advertising standard will be applied? One consequence of which would be that IAs will be discouraged from blogging, tweeting, etc.?”


Yes, that's absolutely right! If you look at the day-to-day compliance issues that SEC- and state-registered RIAs face versus Registered Reps regulated by FINRA, you see that RIAs have a lot more freedom.

The rules reps face are much more stringent because they are supervised by BDs. An advertising-rules manual from a BD that is given to reps is typically 100 pages in length or more.

In contract, RIAs supervise their own compliance and don't create elaborate compliance bureaucracy. They can operate more efficiently and with less hassle–tweeting and blogging, for instance.

Rules RIAs face are very serious but simple. In a nutshelll: disclose all conflicts, don't make anything approaching a false claim, don't advertise a performance track record unless you've had it checked over by an expert in this area, and don't publish any sort of testimonials. That arguably covers just about everything RIAs need to worry about when it comes to advertising.

Keep in mind, the regulation of RIAs is different from regulation of reps for good reason. RIAs have traditionally been a pretty trouble-free area.

When I wrote The Advocate column at Worth magazine during 1994 and 1995, I was charged with helping investors who felt they had been ripped off. I received scores of letters from investors every month. None of them ever was a complaint about an RIA. Not a single one!

Since then, however, many more advisors have realized the benefits of not being affiliated with a BD and have set up RIAs and dropped their securities licenses. Invariably, I fear, the ranks of RIAs have been infiltrated by less competent advisors and some entirely lack integrity. Even an active NAPFA member was recently caught up in scandal.

RIAs should have been more active in policing their ranks themselves. THe FPA, NAPFA, and CFBP Board have made a lame efort at creating a self-regulatory body for over 10 years evenr they it was becoming obvious that the industry was becoming less exclusive and and more open to unethical behavior, and they all failed to get anywhere. Now the horse is out of the corral. We've had Madoff and, worse still, a string of other frauds.

Meanwhile, many RIAS have become irresponsible in following the rules. Just yesterday, for instance, I came across an advisor on LinkedIn who was recommending his partner! That could easily be construed as a testimonial. And what value does it have? It’s an endorsement from his partner! And this is an IA rep I know for years who has been in a leadership position at FPA! He's attended webinars about social networking compliance and knows this is an issue.

Also yesterday, an IA rep told me he had testimonials on his LinkedIn profile page from leaders of important institutions in his niche. When I mentioned that this may violate the rules prohibiting testimonials, he went on a rant about how the rules are outmoded and don’t make sense in a Web 2.0 world. While he may be absolutely right in saying that the testimonial rules on RIAs may be outdated, he can’t just ignore the rules! We'd have anarchy if everyone ignored traffic lights that are unresonably long or stops signs we deem to be misplaced.

Calls for more regulation of RIAs will be hard to fight at this point. The shape and form remains a big unknown. Since RIAs don’t have the equivalent of a BD, what can take its place in a new regulatory regime administered by a branch of FINRA? I wish more advisors would chime in here on this issue.

2 Responses to “More On RIA Regulation Changing”

  1. May 22nd, 2009 at 3:52 pm

    Dave Moran says:

    Your comment about the number of b/d’s opting for RIA status is interesting in a couple of ways. It’s possible to be registered as an RIA while holding your securities license(s). Does that mean that the "break away" advisor gives up their secrities license? I doubt it because there’s still alot of 12b-1 revenue to be collected. The question is how does the b/d handle an advisor who is doing securities business through them but is registered as an IA? More than that who is ultimately responsible for the approval of sales and marketing materials attributable to the securities business that ends up as fee revenenu under the RIA model? At the end of the day the attractiveness of the RIA mdoel is "full disclosure". Let the client know where the friction is between them and the capital markets and what the number is. That’s not an easy thing to do under the b/d model because there are so many hands in the pie.

  2. September 15th, 2011 at 11:46 pm

    Brook says:

    Having my feet in both camps I have come to think of my RIA as the “put option” if it becomes too difficult to operate in a BD environment. My BD exists within my business so I can access certain series 7 investments for my cleints who need them. This potential adverse selection coupled with the fact that many direct investments are becoming available to RIAs creates and environment where the BD becomes a bit of a dinosaur. FINRA knows this, which is why they seek and will likely become the RIA compliance entity; which will create a learning curve indeed.
    For the sake of the consumer one has to pray the pendulum does not swing too far.

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