Advisory firms need to prepare for the financial communitys coming switch from the London Interbank Offered Rate (LIBOR) as the most commonly used interest rate benchmarks. Those who think of the benchmark situation as a problem affecting primarily banks are likely to be in for a rude shock, as many portfolios and financial contracts may be affected by it.
The world of advisory firm compensation is changing and will continue to change. The next five to 10 years may see discounts, alternative forms of compensation, clients making investments that do not involve fees at all, and more. Advisers that want to stay ahead of the curve will keep up to date and be prepared for any likely eventuality.
With the past year almost over and a new one about to begin, its time to take a look back and take stock of what was accomplished in 2018 and what issues remain. The past 12 months found major developments involving standards of care for advisers and broker-dealers, the emergence of an SEC strategy regarding cryptocurrencies, a full year in office for a new SEC team and philosophy, the rising challenges of cybersecurity, and more.
It may sound like an obvious point to make: If an advisory firm promises clients that they will receive fee discounts at certain breakpoints based on the amount of assets they turn over to the adviser for management, it must follow through and provide those discounts. However, if an advisory firm fails to implement procedures to make good on these promises, it may find itself both shortchanging clients and facing SEC sanctions.
The Investment Adviser Association is not happy with the recent testing of the SECs proposed Form CRS. In a December 6 statement, the IAA said that the testing of the relationship summary form, conducted by the Rand Corporation at the agencys behest, is substantially flawed and does not provide a reasonable basis for adopting Form CRS as proposed.
Form CRS, like a number of the SECs standards of care proposals, has run into significant industry criticism, but the Commission may take some satisfaction from a recent investor survey finding that nearly 90 percent of respondents said that the form would help them make more informed decisions about investment accounts and services.
Advisory firms receiving requests from clients to refund their advisory fees need to do so on time and in accordance with their advisory contracts, policies and procedures, and other disclosures. Failure to do so, whatever the reason, may draw attention from SEC examiners and possibly the Division of Enforcement.
Advisers may see agreements with other advisory firms as a way to enhance revenue. While such third-party agreements may on their face bring in additional dollars, advisers should also take precautions that they dont create conflicts of interest with clients. When that happens, the agreements may bring in more than additional revenue - they may bring in SEC examiners and investigators.
The SEC reached a settlement with a dually-registered advisory firm / broker-dealer that involves the issue of recommending higher-cost share classes of securities to clients when lower-cost share-classes of securities are available. This latest share-class settlement has an added wrinkle in that the firm may have had a conflict of interest because, in its capacity as a broker-dealer, it allegedly received the additional service fee from the purchase of the higher-cost shares.
Does the Department of Labor just not get it? Investment advisers are already fiduciaries, both under the Advisers Act and under ERISA - yet the DOLs Fiduciary Rule, as currently written, requires that advisers be fiduciaries not only after client contracts are signed, but during pre-contract and sales discussions. That is the view of the Investment Adviser Association, which, in an April 17 comment letter to the Department, makes clear that it wants that definition changed.