More Americans are entrusting their savings and retirement assets to the investment advisory industry, possibly because of the growing complexity of investment products, SEC Commissioner Luis A. Aguilar said.
Surveys show investors trust their investment advisors, which Aguilar notes is a good thing, but the complexity of financial products also means there is more room for corrupt behavior by unethical advisors, Aguilar warned.
The commissioner spoke before a group of lawyers and compliance officers yesterday at the Regulatory Compliance Association’s 2013 program on regulation, operations and compliance. He warned of the compliance challenges facing the industry because of the complexity of products, the growth in the assets being handled and the increase in the number of advisors and firms.
Aguilar's remaks come at a time when the SEC is trying to increase its staff and its scrutiny of the financial industry. Over the last 10 years, the number of investment advisors has grown by 50 percent and their assets under management doubled to $44 trillion in 2011, he said. At the same time, the number of enforcement cases brought by the SEC and by state regulators also has grown dramatically.
Aguilar said he is concerned about the damaging effect the complaints against advisors can have on the trust people have in their advisors and the industry as a whole.
“The commission has always recognized the advisors’ broad fiduciary duty to act in the best interests of their clients and the need to address all conflicts of interest between advisors and their clients,” Aguilar said.
Aguilar said the SEC has seen “troubling instances of firms ignoring their compliance responsibilities.” It recently issued a risk alert after staff members observed widespread and varied non-compliance with the SEC’s custody rule.
Another area of concern for the enforcement teams is insider trading, particular in the hedge fund industry, he said. There is a “continuing need for vigilance in this space,” he said. “Investment advisory firms should assess whether they have effective policies and procedures to identify and prevent the illegal use of inside information.”
Still another problem area is the valuation of assets, he said. There is an inherent conflict of interest that may arise in how advisors and broker-dealers place a value on investments, including being able to charge more fees for higher valuations. The commissioner warned advisory firms to pay close attention to valuation processes.
“Given the compliance challenges facing investment advisors and the significant risks posed to investors when things go wrong, it is not surprising that the commission and state securities administrators have a greater focus on the asset management industry,” he said.