Via America’s Lawyer: The rules of Wall Street are being rewritten as investors opt for registered investment advisors over traditional brokerage firms. Filling in for Mike Papantonio this week, attorney Sara Papantonio is joined by attorney Michael Bixby to discuss more.
*This transcript was generated by a third-party transcription software company, so please excuse any typos.
Sara Papantonio: Michael, there’s also been some major changes taking place in the finance industry and those changes could have big impacts on investments and dispute resolutions. So tell us what’s happening on that front.
Michael Bixby: Sure, Sara. So this is something that’s near and dear to my heart. I work and I represent a lot of investment fraud victims, regular people, main street investors. And you’re seeing a significant shift that frankly, most people are not even recognizing, most people are not talking about and it’s very subtle, but it’s extremely significant. And what’s happening is the traditional model in the financial services industry is, is brokers, brokerage firms, but it’s shifting away now to registered investment advisors. And brokerage firms they are, are, are regulated, they’re monitored by FINRA, the financial industry regulatory authority. These RIAs are regulated by the SEC and by state regulators and what’s happened is you’ve seen a huge boom where people who were previously brokers are now becoming registered investment advisors. They’re leaving the big firms they were a part of, and they’re going off on their own as a solo individual or 1, 2, 3 individuals with the firm and investors, mainstream investors, don’t understand the difference of this. So you see a lot of very, very small firms where the regulations are not as consistent, where the compliance systems are not as consistent and this is creating a number of issues and problems for investors. You’re actually seeing, there’s 14,000 registered investment advisors. Today, there’s only about 3,500 or less brokerage firms. So the shift is significant and there’s a lot of reasons for it and a lot of regulatory arbitrage that’s happening.
Sara Papantonio: So we’re hearing that there’s something like $110 trillion being managed by these RIAs, is what we’re calling them. Now, what effect does this have on investors? Are we talking about big business investors or are we talking about mom and pop investing their 401ks, their retirement plans? Tell us that.
Michael Bixby: Sure. So you’re, you’re exactly right. And there are some, sure, there’s some institutional investors, but it’s 61 million clients, that $110 trillion you talked about is 61 million clients. The lion’s share of those clients are regular mom and pop main street investors. People who are trusting an advisor to act in their best interest. And that’s the whole thing about this. Registered investment advisors are supposed to be fiduciaries, which is great, that’s, it to us, that’s significant, fiduciary means put the client’s interests first. You have to do what’s best for the client. But the reality is that fiduciary standard is not being enforced and in fact, the regulations are extremely inconsistent. There’s not enough regulatory examinations going on. You actually see examples where customer complaints are at a five-year high, but regulatory actions, disciplinary actions are at a five-year low. Restitution is at a five-year low. So what’s happening is you see this shift and it’s creating all sorts of problems.
Arbitration is another issue where these clients are being forced into arbitration and it’s incredibly inconsistent. There’s mandatory arbitration clause. In FINRA, there’s one forum. Instead now, you’re getting divided into numerous forums and there’s different rules. Some people create their own rules. There’s a, we saw recently with a case where somebody had a Christian conciliation rules and it’s not a standardized forum. This makes it very, very complicated and to make matters worse, these firms, they’re very small. It’s not a big brokerage firm that has thousands and thousands of employees. So if something goes wrong and clients suffer harm, these firms are not even required to have insurance, Sara. So you and I, in Florida, we have to have insurance to drive our cars. But these registered investment advisors who are managing trillions, tens of trillions of dollars of retirees money, if they don’t, if they get sued, if they do something wrong, if they make faulty recommendations, and they don’t have to have insurance and they don’t necessarily even have to pay the award, which is a huge issue. So these issues need to get addressed.
Sara Papantonio: Yeah, that’s very, very significant and I hope you continue to address them.