There are many different types and classes of financial experts that provide assistance and advice to investors. However, accountability and disclosure requirements can vary a great deal. Many financial advisors are not required to disclose any conflicts of interest they might have in recommending a particular investment.
RIAs are held to an extremely high legal standard by the fiduciary rule.
RIAs are defined by the Investment Advisors Act of 1940 defines RIAs as any “person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.” This definition is rather broad. However, generally speaking, only investment advisors managing at least $25 million assets are required to register with the SEC.
What makes RIAs an invaluable resource for investors is that the Investment Advisors Act compels RIAs to adhere to a fiduciary standard that brokers and other advisors are not. The Department of Labor’s planned application of the fiduciary rule to a much broader array of brokers and advisors has been delayed, and may well be canceled entirely.
This would leave RIAs as the only class of financial advisor bound by this duty, which requires RIAs to disclose any of the following while advising a client:
- Any conflicts of interest or existing relationships between the advisor and the recommended investment.
- Any past conflicts of interest, or any potential future conflicts of interest.
- Any unusual financial risk inherent to the investment strategy employed.
- Any risks inherent to the methods of analysis used by the advisor.
In a situation where an RIA is accused of improper conduct, the RIA bears the burden of proof for showing the SEC that they made all necessary disclosures, and took the necessary steps to protect their clients. This means that they have to constantly document their actions, communications, and rationale for decisions, and thus always have the financial well-being of their clients at the front and center of their minds.
Working with a Registered Investment Advisor is advantageous for investors because RIAs can recommend non-securities and non-institutional investments. They are not bound by investment houses or brokerage firms to sell their registered investments or approved funds. They are free to recommend any investment opportunity they deem to be in their clients’ best interests, whether it be real estate, private placements, or in the case of Socotra Capital, trust deed investments.
This is why Socotra Capital prefers to work with Registered Investment Advisors.
At Socotra Capital, we are strong believers in putting the financial security of our investors before our own financial self-interest. This is why we prefer to work with Registered Investment Advisors who are compelled to protect the interests of the clients they advise.