Your RIA, Their Money!

As an RIA consultant, I continue to be amazed at those firms who do not take the time to properly inform themselves about the regulatory and liability aspects of engaging in RIA activity. Ignorance and/or good intentions are simply not enough.

First, it’s your RIA. You are responsible for ensuring that your RIA is in compliance with all regulatory and legal requirements. Far to often RIA firms tell me that their broker-dealer will tell them whatever they need to know.

Under NTM 95-44, the only responsibility that a broker-dealer has to RIAs owned by their registered representatives is to monitor and supervise their representatives training activity.  Broker-dealers are not going to engage in activity that could create unnecessary liability exposure when they are legally required to do so.

Another common mistake I see RIAs make is not understanding their legal obligations to their clients.  As a securities attorney I repeatedly see the multi-color pie charts with recommendations to invest in numerous asset categories.  When questioned about the quality of their advice, they attempt to defend their asset allocation  recommendations based upon the popularity of their software program. I, in turn, open Dr. Markowitz’s seminal work, “Portfolio Selection,” to page six and ask them to read the section at the bottom of the page.

RIAs cannot guarantee the performance of their recommendations and are not legally required to do so. But their recommendations must be prudent and in the client’s best interests.  If a client wants to pursue an ultra-conservative strategy, it’s their right to do so.

Yes, they may be exposing themselves to risks such as purchasing power risk, and you should advise them of such risks, but unless what they are proposing to do is illegal, it’s their right to do so. Just be sure to document what your recommendations were and that you advised the client of such risks. And if what they are proposing to do is illegal and/or clearly exceeds the suitability guidelines for the client,  the RIA clearly cannot participate in such conduct. Yes, you may lose the account, but better to keep your licenses.

And finally, on the topic of suitability, every RIA should read and re-read the James B. Chase decision. The Chase decision discusses the two-prong test used in assessing suitability – the client’s willingness to accept risk and the client’s ability to bear investment risk. And be forewarned, a new prong to the suitability test is gradually appearing, that being the client’s need to accept investment risk at all.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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