Top RIA compliance news articles for the week of Feb. 10, 2023

Custody battle: SEC wants advisers to take more care about where they store investor assets (Author – Dan Shaw, Financial Planning)

The SEC has proposed a new rule which would require RIAs to hold all types of client assets with third-party custodians that meet certain investor-protection standards. Currently, RIAs are required to use third-party custodians to hold clients’ stocks and mutual fund investments, but not necessarily for cryptocurrency, real estate, derivatives and other assets.

The SEC’s custody rule was last amended in 2009. The new rule, which is still under consideration, would update the existing rule to address changes in the investment landscape and new risks to investors. The proposal has been advanced by the SEC in a 4-1 vote.

2023 RIA M&A off to sluggish start (Author – Bruce Kelly, Investment News)

According to a report by Fidelity, the market for acquiring RIAs got off to a slow start in 2023, as buyers and sellers weigh rising interest rates and high valuations for firms when doing the math on potential deals.

The second half of January saw RIA mergers and acquisitions slow down sharply from the first half of the month, yielding only three RIA transactions. Smaller firms continued to be involved in deals, accounting for 65% of January’s activity. Though the fourth quarter of 2022 saw a 46% decline in RIA assets involved in deals compared to the third quarter, 2022 still wound up with a record 229 RIA transactions, a 7% increase over 2021. The broker-dealer side of the financial advice industry saw only one deal in January, a sale of a $24.8 billion retail business.

Adviser texting, DOL fiduciary rule are hot-button issues this year (Author – Melanie Waddell, Think Advisor)

Sara Crovitz, partner at Stradley Ronon in Washington, has identified several SEC rules which advisers should be aware of in 2023, including the SEC’s sweep of off-channel communications such as text messaging and other electronic communications.

Industry trade groups have raised concerns that the SEC sweep exceeds the agency’s authority, as the commission has asked investment advisers to have the personal phones of several employees imaged and reviewed, seeking evidence of any off-channel business communication, regardless of its nature. Crovitz also said the DOL is likely to deliver on a new fiduciary rule this year. Crovitz also cited the outsourcing proposal and the proposed amendment to the investment advisor custody rule, which the SEC will consider on Feb. 15.

Florida court strikes down DOL guidance making rollover advice fiduciary (Author – Mark Schoeff, Jr., Investment News)

A federal court in Florida has struck down a DOL guidance which recommended rolling over retirement assets from a company plan to an individual retirement account (IRA) would trigger fiduciary duty requirements under the Employee Retirement Income Security Act.

The American Securities Association sued the DOL, arguing that the interpretation of the five-part test for determining whether an adviser is a fiduciary was too narrow. District Judge Virginia M. Hernandez Covington ruled that the DOL’s interpretation of the test was “arbitrary and capricious” and vacated the policy. However, Covington granted DOL summary judgment on counts that involved other ASA allegations against FAQs. The current presidential administration is considering a rule proposal that would expand the definition of fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA).

How RIA firms are dealing with hiring and compensation challenges (Authors – Brandon Kawal & Rebecca Daves, Wealth Management)

Unemployment in the U.S. is at an all-time low, which is affecting the advisory industry in terms of labor shortages, high turnover and wage pressure. A compensation trends survey conducted by Advisor Growth Strategies found that RIA firms are struggling to fill less experienced and portable positions such as operations or client service associates, which has caused upward pressure on wages.

Offering a strong benefits package and opportunities for growth, such as peer-to-peer training and comprehensive fringe benefits, is crucial for attracting and retaining talent. Firms which offer career paths for new hires with compensation increases that reflect their progression see the lowest turnover rates. Investing in team development, compensation, benefits packages and ongoing feedback is a worthwhile investment in the long-term growth, earnings and valuation of the firm.

Don’t forget to check out last week’s top RIA compliance news articles recapping the release of the SEC 2023 exam priorities, amendments to the RIA Custody Rule, a look at cryptocurrency and environmental, social and governance (ESG) investing and a highlight of COMPLY Chief Technology Officer Helen Johnson.