Disclosures, Fraud, Suitability – Target of State Regulators
Failure to register as an investment advisor and failure to register as an investment advisor representative were the leading reasons of enforcement proceedings, according to the North American Securities Administrators Association’s (NASSA) most recent annual report.
In addition, fraud and failure to maintain adequate compliance policies and procedures ranked high, while breach of fiduciary duty was linked to the failure to report conflicts, securing fifth and sixth position, respectively.
NASAA found that fee-related infractions ranked as the seventh most typically cited reason for enforcement proceedings, while violations of current policies and procedures ranked eighth, and suitability concerns ranked ninth.
Equities, exchange-traded funds, and private placements tied for 10th place as issues involved in formal and informal actions against state RIAs and investment advisor representatives, NASAA noted, as well as failures to disclose disciplinary actions.
NASAA announced earlier this year that, based on investigations and enforcement actions, the top schemes in 2022 were related to digital assets, social media, internet fraud, and promissory notes.
The number of state-registered investment advisory firms decreased by 166 from 2022 to 2023, to 16,897, NASAA also noted. Furthermore, the combined assets under management of these firms decreased by nearly $60 billion, to approximately $362 billion. The firms reportedly had a total of 838,648 clients, with approximately 80% of them being retail investors and approximately 20% being high-net-worth clients.
“Many of these advisors are small- and mid-sized businesses, and our goal is to help them serve their clients while ensuring they understand and comply with state securities laws,” NASAA president Claire McHenry said.
The top 5 most state registered investment advisors are Texas – 4,628, California – 3,643, Florida – 1,960, New York – 1,299, and Illinois – 942, according to NASAA.
Models and Services
The report also revealed that asset-based models remain the preferred option, with 84% of firms indicating that they charge clients based on a percentage of assets under management. Hourly billing and fixed fees were nearly deadlocked for second place at 51%, with fixed fees leading by a mere fraction of a percentage point.
Nearly one in 10 firms said they use performance-based fees. The adoption of commissions and subscription-based pricing was minimal, with only 2.8% and 1.6% of firms, respectively, implementing them.
In the 2023 census conducted by NASAA, 84% of enterprises identified portfolio management for individuals as a key service they offer. Financial planning ranked second, as revealed by 64% of state RIAs.
Approximately 25% of organizations reported their involvement in the process of selecting additional advisors, while around 17% indicated that they provide pension consulting services. Slightly over 15% of the cohorts reported engaging in portfolio management for business and institutional clients, whereas 4.4% indicated managing portfolios for pooled investment vehicles.
Organized in 1919, NASAA is a voluntary association whose membership consists of 68 state, provincial, and territorial securities administrators across the country, the District of Columbia, Guam, Puerto Rico, the U.S. Virgin Islands, Canada, and México.
