The North American Securities Administrators Association (NASAA) has just published its annual list of the most prevalent scams. Among the usual suspects (oil and gas drilling programs, real estate fraud, precious metals) is a warning about “inappropriate advice or practices from investment advisers.” Bernie Madoff was a registered investment adviser (RIA). His fraud has drawn significant scrutiny to an industry not accustomed to the attention.
The registered investment advisory business is not well understood, even by its clients. Unlike broker-dealers, registered investment advisers are not governed by a dedicated self-regulatory organization like FINRA. Rather, the U.S. Securities and Exchange Commission, Division of Investment Management, directly regulates all federally registered RIAs. The significant increase in the number of RIAs over the past several years has severely strained the SEC’s regulatory resources.
RIAs are fiduciaries to their clients. They must put their clients’ interests first, mitigate conflicts of interest, disclose all material facts, and make only suitable investment recommendations.
Customers of registered investment advisers regularly engage our firm to help them determine whether their RIA has met its fiduciary obligations. Too often, we discover that the RIA abused the trust of our client by providing self-interested investment advice or otherwise abusing undisclosed conflicts of interest. Designation as a Registered Investment Adviser is very easy to acquire and does not automatically endow its holder with a special degree of knowledge or ethical conduct.