There are no net capital requirements for SEC-registered advisors, said Robert Plaze, associate director for regulation of the division of investment management for the SEC.
"If a broker doesn't pay a Finra arbitration award, they get their registration suspended," said Jane Stafford, a Kansas City, Missouri-based securities lawyer. If advisors don't pay, they "may have to disclose that they have an unsatisfied judgment against them, but no one's going to shut them down."
Advisers must generally register with the SEC if they manage $25 million or more and register with the states in which they do business if they manage less. That threshold will rise to $100 million by June 28, 2012, shifting about 3,200 advisors from SEC to state oversight.
Fees And Commissions
Advisers may have fewer conflicts of interest than brokers because most don't accept commissions, said Barbara Roper, director of investor protection at the Washington-based Consumer Federation of America. More than 95 percent of federally registered investment advisors charge clients a fee based on a percent of assets under management, and about 9 percent receive commissions, according to a January SEC report on the investment-advice industry. Most broker-dealers receive commissions, the report said.
"We're still seeing people charging fees that are way too high," in spite of the industry's move away from commissions, said Liz Weston, author of "The 10 Commandments of Money." "We have a problem of an industry that's geared toward making money more than geared toward serving clients."
Adviser fees generally range from less than 1 percent to 2 percent of assets under management and may vary based on the size of a client's account. Those may not include separate hourly fees or charges for underlying investments.
Stocks And Bonds
Charging fees based on assets under management may also create a conflict of interest if it encourages the advisor to concentrate clients in higher-fee or higher-risk investments, said Michael Engdahl, an attorney and associate professor of financial services and business law at Edinboro University in Edinboro, Pennsylvania.
Engdahl is representing investors in arbitration against an RIA firm that directed clients into stock portfolios rather than bond portfolios, which had lower fees. The firm had invested Engdahl's retiree clients 100 percent in stocks, he said. This year advisors have had to include a plain-English brochure detailing their fee schedules in regulatory filings with the SEC. The brochures are available on the SEC website.
Many investors choose an advisor through referrals, said Mark Matson, an advisor based in Mason, Ohio. They should check an advisor's disciplinary record with the SEC and state regulators, and should interview multiple candidates before investing, said the CFA's Roper. There are no "surefire" steps to guarantee an advisor is competent, she said.
What's Disclosed
Arbitration awards or legal settlements must be disclosed on an advisor's ADV form, which RIAs file to register with the SEC or with states, if they reflect on the integrity of the advisor, said the SEC's Plaze.