Taking Sides: Advisers earn a B-plus as SEC gets few gripes

Securities and Exchange Commission records show a surge in complaints about registered investment advisers in 2000, as reported in InvestmentNews last week.

Let’s not overreact, but let’s also not become complacent. Let’s take stock and correct the deficiencies.

Overall, an examination of the records of the complaints filed with the SEC indicates that there are no systemic problems that need to be addressed.

The records show that the overall number of complaints, while up last year, was tiny. Only 183 alleged misrepresentation, 105 alleged account-transfer problems, 95 requested investigation, 83 claimed unsuitable recommendations, and 80 claimed unauthorized transactions.

Considering that RIAs have millions of clients across the country, and execute millions, perhaps billions, of transactions and thousands of account transfers, it is a record of remarkable honesty, fairness and efficiency.

Further, while the number of complaints was largest for the largest organizations, here again, the numbers were tiny, and for most of the major companies, were stable or declining at a time when the numbers of accounts and transactions were surging.

Yes, there was an increase in the number of complaints during the last year of the bull market and the first part of the correction, especially the latter.

But while some of those complaints no doubt arose because, as securities lawyer Vincent DiCarlo said, “the rats came out of the woodwork,” many also no doubt arose because unsophisticated investors were lured into the market by the appearance of easy money.

Those clients were disappointed when they didn’t win the lottery with their investments. And many of them surely claimed to be far more risk tolerant than they actually were. Risk is easy to bear in the abstract, but far more difficult when its implications hit home in the form of sharp declines in net worth.

It’s easier to blame your misfortune on your adviser than to look into the mirror and accept that you weren’t ready to take on the risk of equity investing.

Nevertheless, the industry should not be complacent. One justified complaint, especially if it involves fraud, misrepresentation, unsuitable recommendations or unauthorized transactions, is too many.

The SEC and the industry should examine each complaint closely to determine if there is a legitimate problem. Action should be taken against investment advisers who deliberately or carelessly harmed their clients. The “rats” must be identified and chased out of the business.

If better training or better systems are needed to reduce customer problems, then they must be provided.

But overall, RIAs passed the examination of the SEC file of complaints against them. They may not have scored an A, but certainly a B-plus.