Articles Tagged with investment advisor

shutterstock_150746A recent InvestmentNews article explored The Securities and Exchange Commission’s (SEC) attempts to prevent conflicts of interest at registered investment advisers, a breach of their fiduciary duties, by focusing on potential misuse of popular flat-fee wrap accounts. The use of these accounts have given rise to claims of “reverse churning.” As we previously reported, “churning” is excessive trading activity or in a brokerage account. Churning trading activity has no utility for the investor and is conducted solely to generate commissions for the broker. By contrast “reverse churning” is the practice of placing investors in advisory accounts or wrap programs that pay a fixed fee, such as 1-2% annually, but generate little or no activity to justify that fee. Such programs constitute a form of commission and fee “double-dipping” in order to collect additional fees.

The SEC is looking into the practice by which clients pay an annual or quarterly fee for wrap products that manage a portfolio of investments. Investment advisors who place clients in such programs already charge fees based on assets under management (AUM) and the money management charges for wrap products are in addition to the AUM fee. According to InvestmentNews, the assets under these arrangements totaled $3.5 trillion in 2013, a 25% increase from 2012. Included in these numbers include separately managed accounts, mutual fund advisory programs, exchange-traded-fund (ETF) advisory programs, unified managed accounts, and two types of brokerage-based managed accounts.

Reverse churning can occur under these arrangements if there’s too little trading in the accounts in order to justify the high fees. In August, the SEC’s scrutiny of these products came to the forefront with the agency’s victory in a court case that revolved in part around an adviser’s improperly placing his clients into wrap programs. A jury decided in the SEC’s favor against the advisory firm Benjamin Lee Grant that the SEC argued improperly induced clients to follow him when he left the broker-dealer Wedbush Morgan Securities to his advisory firm, Sage Advisory Group.

shutterstock_138129767Most people do not realize that there is a big distinction between brokers and investment advisors. Many people think, they both recommend securities. While that is true, that is pretty much where the similarities end.

A broker is regulated by The Financial Industry Regulatory Authority (FINRA) a self-regulatory organization (SRO) as provided for under the Securities and Exchange Act of 1934. On the other hand investment advisors are regulated by the Securities and Exchange Commission as provided under the Investment Advisors Act of 1940 (IAA).

A broker is more akin to salesman. A broker’s obligation is to make sure that his or her recommendation is suitable and appropriate for the investor given the investors objectives and other information. However, an investment advisor is more like an appraiser of securities, his or her job is not only to make recommendations that are not only suitable but to continually monitor the investors account to ensure that the investor has a viable financial plan over time. Consequently, a broker is compensated on a transactional basis while an investment advisor is paid a percentage of the assets managed by the advisor.

This is the most common question a potential client asks during an initial interview.  This article is directed to those investors who are wondering if they have a claim but have not yet sought a consultation.  Hopefully, this article will provide some insight into what a securities fraud attorney looks at when reviewing a potential client’s claim.  However, I would stress that all evaluations are individual in nature and while this article is meant to provide generally instructive insight, only a full one-on-one consultation with an attorney can provide a full review of your claim and provide individual guidance.

In my analysis of a potential client’s securities claim I look at two primary factors: 1) the strength of the liability case; and 2) the ability to collect from the defendant.  The answer to these two factors weigh heavily in moving forward with the potential client’s claim.  The strength of the liability of the claim is the initial assessment of how likely a judge or arbitration panel would likely find the defendant liable for misconduct.  The ability to collect factor looks at what potential defendants could be liable for the misconduct the client is alleging and the ability of those defendants to compensate the client’s losses.  In many cases, the second factor will not need to be seriously investigated.

What factors influence the strength of the liability of the case?  This is a hard question to answer because each case is different and liability is premised on different factors given the type of claims being made.  In cases of fraud or misrepresentation the strength of the case often lies in the ability to prove the false statements made to the client.  Written communications, emails, advertisements, and other documents that can be proven false or misleading tend to make stronger cases.  If a securities regulator has also found the defendant’s conduct to be fraudulent or misleading or has disciplined the same or another brokerage firm for similar conduct such evidence helps to strengthen the case.

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