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RIAs Overall Applaud SEC’s Increased Oversight Following Labor Department’s New Fiduciary Rule

Nov 15, 2016

The SEC is increasing its scrutiny of Registered Investment Advisers (RIAs) due the growth in the industry, which is expected to continue more rapidly given the Labor Department’s recent fiduciary rule that takes effect in April.  This rule requires broker-dealers who work with tax-advantaged retirement savings to significantly adjust their business models by acting as a fiduciary and putting clients’ best interests first, avoiding conflicts and moving away from the common-pay model known as a compensation grid.  

RIAs agree that the SEC’s increased scrutiny of the industry is a logical step to act in the best interest of those individuals whose money they manage, given the growing numbers in the industry.  However, concerns remain that regulators will not appropriately differentiate between small and large RIAs, putting small firms at greater risk of going out of business if they are fined.

The SEC has increased the number of examiners delegated to provide oversight to RIAs by 20% following a 17% growth over the past two years.  There are now a total of 12,000 RIAs that will be managing more than $70 trillion by the end of this fiscal year, up from $28 trillion a decade ago. In turn, the SEC has assigned fewer examiners to broker-dealers, whose numbers have been shrinking due to the reputational damage incurred during the financial crisis and the growing trend to become a fee-based RIA working either independently or with an affiliated firm.

Matthew Tuttle, founder of Connecticut-based RIA Tuttle Wealth Management, is one adviser who said the new rule has been implemented due to client demand for fiduciary, fee-based relationship with their advisers, which will force more and more traditional brokers to go that route.  Mr. Tuttle also expressed concern about the Commission moving resources away from broker-dealers.

“It is logical that the SEC would need to beef up enforcement in that area,” he said.  “However, I would worry if they are taking resources away from broker-dealers.  Even though that channel is shrinking, it is also the area that has the most potential for abuse, specifically dealing with product suitability and commission practices.”

Michael Kieffer, Founder of Florida-based KIEFFER CAPITAL, added that the new fiduciary rule signifies that the future of the RIA industry is a fee-based platform, meaning a flat management fee charged on assets under management or even just a flat static annual consulting fee.  

“The RIA model allows the client to feel the advisor is working in their best interest, and any recommendations or advice given is without conflicts of interest,” he said. “In conclusion, the SEC will be increasing scrutiny of all RIAs, making sure we are acting as fiduciaries to the client.”

Michael Tanney, Managing Partner and Co-Founder of New York-based Wanderlust Wealth Management, added that while many advisers can interpret the new fiduciary rule as “over-regulation,” he said the wealth management industry only has themselves to blame.

“If professionally licensed wealth managers and the companies they worked for were properly incentivized by making decisions based on their client’s best interest at all times, disclosing cross-selling compensation and other conflicts of interest, and overall acting in a transparent and honest way, there wouldn’t be a need for the Labor Department's fiduciary rule,” he said.  "Unfortunately, everyone in the industry from the salesman, to the fund manager, to the CEO, makes more money by not following their moral compasses and instead focusing on enriching their own lifestyles and stock prices.”  

He added: “What leaves me scratching my head is that if individuals are finally starting to understand how professionals they entrusted with their wealth didn’t always act in their best interest and now have to follow a fiduciary mandate, why shouldn’t their non-retirement accounts be held to the same standard? I applaud the SEC and Labor Department for advocating on behalf of the individual and not the corporation.”

Finally, one RIA in New York expressed apprehension that although the regulation is necessary to align with this growing population, the SEC needs to have specific requirements for smaller firms given their differing risk profile.

EisnerAmper Trends & Developments - November 2016

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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