SEC suit raises disclosure questions for breakaway reps – Investment News

Posted by on Nov 1, 2010 in Uncategorized | Comments(0)

Investment News discusses a recent SEC action against an investment adviser who left a wirehouse and formed his own RIA. Many brokers are viewing RIA business as a magic bullet to solve their increasing unhappiness with the wirehouse life.

I have seen this before. But years ago, it was “wrap fees.” Brokers were tired of being accused of churning (executing trades solely to generate commissions) so they thought that a wrap fee, where a fee is charged as a percentage of assets. But then the SEC found that brokers were setting up wrap fee accounts and not performing any special services or executing trades. So this was not in the clients’ best interest either. A few major firms paid fines to FINRA and/or the SEC for failing to detect this “park and wrap” strategy.

So, how does an investment professional avoid these various potholes? Remember that the regulators do not want you lying to clients. Don’t tell them falsehoods to entice the clients to move to your new firm. If you’re going to have a wrap fee arrangement, make sure services are delivered in return. Simply placing a client in a wrap fee and moving on is not in the client’s interest.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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