As more brokerages add investment advisory businesses, dual registrants need to review how they charge individual clients more often, Securities and Exchange Commission Office of Compliance Inspections and Examinations Director Drew Bowden told Financial Advisor magazine Friday.
“We’re seeing not many firms establishing policies and procedures reasonability designed to conduct periodic reviews to insure the compensation continues to be in the best interest of a client. We don’t see a lot of people making a lot of those kind of evaluations on a regular basis,” said Bowden.
A big reason, pointed out the SEC executive, is the level and kind of service provided to a customer might change over time.
“You can’t just move a client into an account, assess a 2-percent-of-assets annual fee and forget about it,” he said.
Bowden said converting from a brokerage to an advisory model not only means the firm will change its business structure but also increase its focus on the customer’s needs. He noted the suitability obligation of brokerages is an episodic, transaction-by-transaction responsibility, while the fiduciary duty of a registered investment advisor is continuous.
Looking at how the Web is making customer protection more difficult, Bowden said a frequent type of crook 20 years ago was a caregiver or relative impersonating a client. But with the Internet, the criminal could be and have been people in Eastern Europe, he said.
Bowden said the heightened interest by the SEC in cyber security is not leading to increased compliance costs for advisory companies because there are no new rules.