The Benefits and Pitfalls of Dual Registration with An Independent RIA. Jason C. Roberts Edgerton & Weaver, LLP

Transcription

1 The Benefits and Pitfalls of Dual Registration with An Independent RIA Jason C. Roberts Edgerton & Weaver, LLP

2 Presentation Overview Introduction Overview of Dual Registration Opportunities for Dually Registered Advisers Challenges for Independent RIAs Responsibilities Costs Oversight Exposure Benefits of Dual Registration w/ Corporate IA Resources Technology Support and Outsourcing Lessened Concerns Regarding Regulatory Oversight and Liabilities Time Savings Reduced Costs Q&A

3 Dual Registration ti - Driving Factors Market for advice moving from product-driven to client-driven focus Sophisticated, wealthier clients resist sales approach Clients desire to consolidate investment relationships with one adviser Advisers seeking more flexible menu of investment, technology, pricing and operational support Increased profitability

4 Opportunities - Dual Registration Dually registered advisers can offer more flexible menu of investment, technology, pricing and operational support Allows clients to consolidate investment relationships with one adviser Ability to focus on clients, asset gathering and management versus regulatory and administrative issues Liability to clients and regulators generally falls primarily to the broker-dealer Reduced costs and increased profitability

5 Challenges - Inherent Pitfalls of Independent RIAs Additional Responsibilities Independent Adviser Assumes the following Responsibilities: Compliance; Management; Operational; Financial; and Insurance

6 Challenges - Inherent Pitfalls of Independent RIAs Savings are illusory A 2005 Moss Adams study compared affiliation models of RIAs, advisers affiliated with an independent broker-dealer, and wirehouse reps. Assuming a practice generates $500,000 in client revenue and the sole principal takes $250,000 in owner s compensation, the study found the profit advantage to the RIA over the adviser affiliated with an independent broker-dealer, taking into account all expenses, was only $7,226.

7 Challenges - Inherent Pitfalls of Independent RIAs Liabilities Independent RIAs may find themselves more vulnerable to liability claims, as deep pockets are limited to those of the individual adviser

8 Opportunities - Dual Registration w/ Corporate IA Assistance in maximizing best resources from both platforms Support and outsourcing solutions from the broker-dealer Benefits from technology Brand recognition Recruiting Ability to focus on clients, asset gathering and management versus regulatory and administrative issues Liability to clients and regulators generally falls primarily to the broker-dealer Easier to supervise because the B/D has adviser s and broker s activity in one place

9 Q&A

10 Fallout from FPA v. SEC - What is an Investment Adviser? Section 202(a)(11) of the Advisers Act defines investment adviser as: any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities

11 Fallout from FPA v. SEC - Why Does it Matter? In 1963, the United States Supreme Court held in SEC v. Capital Gains Research Bureau, Inc., that Section 206 of the Investment Advisers Act of 1940 imposes a fiduciary duty on investment advisors by operation of law. Section 206 of the Act (generally referred to as the anti-fraud provision) makes it unlawful for an investment advisor to engage in fraudulent, deceptive, or manipulative conduct. Specifically, the Supreme Court in Capital Gains indicated that Congress and the SEC intended that [an investment advisor] should continuously occupy an impartial and disinterested position, as free as humanly possible from the subtle influence of prejudice, conscious or unconscious; he should scrupulously avoid any affiliation, or any act, which subjects his position to challenge in this respect.

12 Fallout from FPA v. SEC - The Merrill Lynch Rule states that a broker/dealer providing advice that is solely incidental to its brokerage services is exempt from the Advisers Act if it charges an asset-based or fixed fee (rather than a commission, mark-up, or mark-down) for its services, provided it makes certain disclosures about the nature of its services when a broker/dealer provides advice that s part of a financial plan when a broker/dealer provides advice that s part of a financial plan or in connection with providing financial planning services, [the advice] is not solely incidental