How do you know your investment adviser is solely acting in your best interest? Sadly, even when it comes to picking mutual funds, your investment adviser may still only be thinking of himself or herself.
Take for example the allegations in a recent proceeding instituted by the SEC on September 2, 2014 against the Robare Group, Ltd. and two individual principals of the firm for failing to disclose a fee arrangement in which Robare was paid between 2 and 12 basis points on the client’s assets investments in no-transaction-fee (NTF) mutual funds on a broker’s platform, as reported by InvestmentNews. One basis point is equal to 1/100th of one 1%, so 10 basis points would equal .1%.
The SEC alleged that Robare earned close to $500,000 in fees over eight years, and failed to disclose the arrangement on the firm’s Form ADV. The SEC further alleged that in 2013, Robare managed approximately 350 separately managed discretionary accounts and had assets under management of approximately $150 million.
The SEC alleged that the fee arrangement created an incentive for Robare to favor mutual funds available on the broker’s platform when giving investment advice to its clients. Robare’s alleged incentive to favor these mutual funds created a conflict of interest with its clients, a fact that was not disclosed, or only partially and incompletely disclosed, by the firm, according to the SEC’s allegations.
The SEC alleged that Robare violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act), which make it unlawful for an investment adviser to defraud or engage in a practice that would operate as a fraud upon any client. Regarding the false or incomplete filings on the firm’s ADV, the SEC alleged that all respondents violated Section 207 of the Advisers Act) by making untrue statements in an application or report filed with the SEC.
According to the InvestmentNews article, the SEC’s Asset Management Unit charged a different adviser in 2012 with also failing to disclose a revenue-sharing arrangement.
Investment Advisers are considered fiduciaries of their customers, and therefore hold various fiduciary duties, including to act in the client’s best interest. If an investment adviser places his or her own interest ahead of their client, they risk breaching those duties, and as illustrated in the allegations made by the SEC in proceedings against Robare, fraud charges by regulators. Investment Advisers who are also registered representatives with a broker-dealer may face private actions brought by their clients for recommending unsuitable investments (i.e. investments that are not proper for the client given their risk tolerance, age and other circumstances).
It is not uncommon for clients to learn that unsatisfactory performance in their brokerage accounts often mask further and more damaging securities law violations. If you believe you were not properly recommended investments, please contact the attorneys at Malecki Law to determine if you have a claim for damages.