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RIAs may face ticking time bomb after SEC slams a $1.9-billion RIA for neglecting ‘orphan’ accounts while charging fees, a problem that may be industrywide
October 26, 2021 — 3:39 PM by Oisin Breen
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Thousands of clients may be getting lost in the shuffle in the face of strong inorganic RIA growth — an obscure problem until federal regulators gave Regal Investment Advisors the royal treatment, in part, for charging full fees and failing to disclose reduced service.

Heart of the matter

Ultimately, the issue of poorly serviced orphaned accounts goes straight to the heart of the RIA value proposition. It centers on just how much an RIA has to do beyond managing investments to count as a fiduciary, says MacKillop.

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John Cataldo: Regal should be a reminder to compliance and operations staff.

“Most RIAs take their fiduciary responsibilities seriously and would not be looking for the minimum requirement.This is as much for competitive reasons as for legal ones.

“An advisor must be reasonably available for client questions and must affirmatively try to check in with the client at least once a year,” he explains.

In most cases, “untended” does not mean uninvested. It mostly means advisors are not reaching out to clients to communicate, handhold or to monitor whether that client’s circumstances have changed enough to warrant a reallocation of risk. 

Indeed, in its Regal ruling, the SEC has told RIAs that it’s not enough to simply act as investment managers. Even if investments perform, RIAs must maintain regular oversight, says Cataldo.

“Regal should be a reminder to compliance and operations staff,” he adds.

Yet it’s not as if an RIA  needs to worry about the goal posts having shifted in some incomprehensively complex manner, says Brian Hamburger, CEO of Englewood, N.J. compliance consultancy, MarketCounsel, via email..

“[Regal] didn’t do what they said they’d do. They didn’t need to provide any value-added services like financial planning; there was no claim that the recommendations weren’t appropriate, just that they didn’t check.”

Regal’s Form ADV notes that clients would receive ‘continuous and focused investment advice,'” he explains.