Wealth Management

With rise of wealth management, a call for more RIA audits

By Renee Caruthers

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The year 2014 has so far shaped up to be a banner one for wealth management. Charles Schwab's 2014 Benchmarking Study reported that registered investment advisors (RIAs) in this year's study had the highest profitability since the inception of the study in 2006. The Schwab study's findings have been backed up by firms' quarterly results. Morgan Stanley has strategically diverged from other Wall Street firms to focus more on wealth management, and it posted strong quarterly results in the first and second quarters of the year when other firms faltered. Morgan Stanley's wealth management revenue increased to $3.7 billion during the second quarter up from $3.5 billion a year earlier and the bank said client assets in the division exceed $2 trillion. Royal Bank of Canada also reported that record wealth management was a driver contributing to the bank's strong quarterly results this year despite slightly declining revenues in the bank's core personal and commercial banking unit. The bank's third quarter results rose 4 percent from the prior year, with wealth management posting a record $285 million in net income up 22 percent from the previous year. With the boon in wealth management, the Securities and Exchange Commission's new Investor Advocate Rick Fleming, appointed to the role in February, is calling for more frequent review and monitoring of RIAs . "The SEC examined only about 9 percent of registered investment advisers in Fiscal Year 2013. This equates to a frequency of approximately once every 11 years," Fleming told an audience at the Southwest Securities Conference in Dallas earlier this month. Calling that level of monitoring "unacceptable," Fleming said that his very first recommendation to Congress was for funds to allow the SEC to hire more examiners for RIAs without delay. But beyond asking for funds from Congress, Fleming is looking to make the monitoring of RIAs more self-sustainable year-over-year through the collection of a "user fee" from RIAs that would be used specifically to fund RIA examinations. "Admittedly, a shorter examination cycle won't stop all fraud, but I believe it will allow the SEC to halt these types of activities sooner and will provide a stronger deterrent to advisers who might otherwise succumb to the temptation to steal," Fleming said. "It will also curtail other unethical practices, including excessive fees, excessive trading, and undisclosed conflicts of interest." There are other options to consider, such as using third-party auditors to conduct RIA examinations if the SEC doesn't have the staff to do it, but Fleming considered that option more costly to taxpayers than a user fee structure. "If the Commission isn't given the resources to do the job adequately and given them soon, it may be left with few options," Fleming said. Read more about: Charles Schwab back to top