Risk Management and Liability Housekeeping for RIAs

In providing consulting and compliance auditing to investment advisers, I often see what they often consider meaningless issues, but I see as potentially significant issues. Two such issues are improper identification of the registered investment adviser and improper handling of customer complaints.

All documents issued by a RIA firm should properly reflect the name of the registered entity. Firms often use what is known legally as a fictitious, or “doing business as/aka” dba, name. Since such a firm does not legally exist, it cannot legally enter into contracts or hold itself out in such a way that would confuse the public as to the true identity of  the RIA firm. For instance, if XYZ, LLC is the actual registered RIA firm, but it does business as “World’s Greatest Wealth Management Company,” then the firm should identify the RIA in all documents as “XYZ, LLC d/b/a World’s Greatest Wealth Management Company.”

The usual response I get from firms is that they are not going to go through all that. Fine, it’s their business, but it begs the question, why didn’t the firm just register as “World’s Greatest Wealth Management Company”  in the first place. What such firms do not consider is that by entering into customer contracts with the RIA properly identified, a customer can come back at any time and invalidate the contract, since the alleged contract involves a legally non-existent party. The customer can demand not only the return of all fees paid pursuant to the legally invalid contract, along with interest on all such money paid.

The potential penalties do not end there. regulators can then follow-up with various charges, including fraud pursuant to Section 206 of the Investment Advisers Act of 1940. Since the states also retain jurisdiction on investment adviser fraud, they can press civil and criminal charges for misrepresentation of the RIA’s true identity. Since this is such an easy violation to establish, regulators often do not hesitate to pursue such actions.

The second common housekeeping mistake I see with RIA firms is the way that they handle customer complaints. While no RIA firm wants customer complaints, RIA firms need to understand that they simply cannot resolve all complaints by returning a client’s money just because they complain. Firms need to have a formalized procedure for evaluating and handling customer complaints.

While it may be expedient to simply return a client’s money, RIA firms need to understand that such a policy can be viewed from a legal and regulatory sense as an admission of wrongdoing. By adopting and following a formal procedure for handling customer complaints and properly documenting the findings from such a procedure, the RIA firm can reduce its potential liability exposure while efficiently resolving the customer complaint. 

As a former securities and RIA compliance director, one of the first things you learn is the proper way to handle customer complaints. The “click your heels three times, just throw money at it and make it go away…quickly” is not the proper way to resolve customer complaints. In fact, such an approach can quickly raise suspicions with attorneys and regulators, which usually only serves to exacerbate a firms immediate and long-term problems.

As a I routinely tell investment advisers, take the time to get it right from the start and it makes it that much easier to protect the firm and concentrate on providing customers with excellent services and growing your practice.

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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