Some Common RIA Mistakes That Regulators Are Focusing On in 2016

Going to start the new year with a rather brief, but important, post. The regulators have announced their intent to perform more RIA audits in 2016. Some recent cases have highlighted issues that do not regularly receive the amount of attention as some other RIA/fiduciary issues.

There have been several cases recently involving the misrepresentation of an adviser’s AUM. Any type of misrepresentation by an adviser would be a violation of Section 206 of the Advisers Act of 1940. While AUM is always subject to fluctuation due to market pricing, withdrawals, distributions and clients leaving, significant variations in AUM are always going to draw the attention of regulators. Significant increases in AUM also raise a red flag. As long as you can properly document your AUM claims, you should have no problem.

Another area that regulators have been focusing on is variances between an adviser’s advisory contract and an adviser’s Form ADV/Disclosure Document. The information provided within these documents should always be consistent. Since the advisory contract actually defines the relationship between an adviser and their client, it will usually be the controlling document unless enforcement of same would be inequitable to a client. This is consistent with the general rule of law that documents will generally be construed against the party who drafted the document.

Along those same lines, language in a contract that attempts to have a client waive rights owed to them by their adviser are void as against public policy. This would also be construed as a violation of the adviser’s fiduciary duty of loyalty, a duty to always put a client’s interests first. This is one reason why I generally advise my consulting clients not to include an arbitration agreement in their advisory contracts. A good securities attorney will jump on that alleging the issues I just discussed.

Asking a client to waive the important rights and advantages possible in trying a case in court, especially the right to conduct meaningful discovery, as opposed to the questionable arbitration process is clearly not in a client’s best interests. Not all my clients follow my suggestion since their broker insists that they include a binding arbitration clause. That’s their choice, but if they own their own RIA, I remind them of that and that they, not their B-D, will be liable if the decisions go against them.

Finally, be sure that you are not misrepresenting the true identity of the investment advisory firm. Simply put, the registered RIA is the name shown on the certificate a firm receives when it registers, not any assumed or fictitious name, i.e., dba name, the firm is using publicly. Contracts executed using only a fictitious name are generally void since there is actually no entity with that name. In such cases, advisers will be required to return any and all money received pursuant to the fraudulent advisory contract.

The proper identification of the advisory firm often comes up involving dually registered representatives who who are offering advisory services through their B-D’s proprietary RIA firm. For some reason, the reps do not want to use the B-D’s RIA’s registered name, but want to use their own fictitious name, presumable to impress prospective clients.

A good compliance department would catch this and ensure proper identification of registered advisory firm, such as “B-D Advisers dba Greatest Investment Adviser in the World,” on all advisory contracts. And yet every year, I run across advisory contracts that are executed using only the GIAW name, subjecting them to possible revocation and substantial fines and other monetary penalties.

Offenders often try to justify the violation by saying that their business cards indicate that advisory services are offered through their B-D. But a business card is generally not considered part of the advisory contract and the “four corners”rule is usually applied to contracts,  meaning that only that which is within the four corners of a page will be considered as part of the contract.

Since the 2015 year-end performance numbers are out, I will be updating the sample of the ERISA Forensic Fiduciary Prudence Analysis sometime this week. I will post a notice on the blog once I have posted the update on SlideShare.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member 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 on sound, proven investment strategies that will help them protect their financial security.
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