SEC Report on RIAs: Dazzling, Troubling

January 24, 2011

By Linda Koco
Contributing Editor

Jan. 24, 2010 -- A new study from the Securities and Exchange Commission gives details on the registered investment adviser (RIA) population that are as dazzling as they are troublesome. was developed at the behest of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010. The SEC was directed to offer recommendations to Congress on how to improve RIA examinations. The findings were delivered to Congress last week.

The report paints a statistical picture of the RIA population that life insurance and annuity professionals who deal with RIAs, or who are themselves RIAs, rarely see in one spot.

The picture is one of rapid growth amid a steadily declining number of regulatory examinations of RIAs.

On the growth side, the report says the ranks of RIAs grew “significantly” over the past six years, from 8,581 in Oct. 1, 2004 to 11,888 on Sept. 30, 2010. [Note: All data in the report came from the electronic filing system operated by the Financial Industry Regulatory Authority (FINRA).]

This growth represents a total increase of 38.5 percent, for an average annual growth rate of 5.7 percent, the SEC staff says.

The report did not mention, but insurance professionals know, that some of this growth came from annuity professionals who left their existing practices to set up RIAs so they could discuss investments with clients. The numbers involved have not yet been documented.

Significantly, the SEC report says assets managed by RIAs grew at even faster rate over that six-year period than did the RIA numbers. The assets rose by 58.9 percent to $38.3 trillion from $24.1 trillion, for an average annual growth rate of 9.1 percent.

All this growth occurred despite the 2007-2009 U.S. recession, the SEC staff points out. Assets managed by RIAs did fall to $33.1 trillion on Oct. 1, 2009 from their July 1, 2008 high of $43 trillion, the staff notes, but the assets “partially rebounded” after that.

The sobering news in the report has to do with RIAs examinations, which are performed by the SEC’s though RIA numbers and assets under management kept growing over the six years studied, the SEC staff says the number of staff examiners of RIAs actually declined by 3 percent, from 477 to 460.
At one point, the number of examiners dropped to 425, but new appropriations later enabled re-staffing up to 460.

Even more startling: The number of examinations of RIAs conducted annually decreased by 29.8 percent, from 1,543 in 2004 to 1,083 in 2010, the SEC staff writes.
At the 2010 examinations rate, “the average registered adviser could expect to be examined less than once every 11 years, compared to approximately once every six years in 2004,” according to the staff.

The staff blames the drop in both number and frequency of examinations, in part, to the rising number of RIAs and the declining number of OCIE staff. Changes in the examination program also had an impact.

Dodd-Frank will likely cause a short-term decrease in the number of RIAs, predicts the staff, noting that something similar happened after the 1996 enactment of the National Securities Markets Improvement Act (NSMIA) which reallocated federal/state responsibilities for RIA regulation.

But RIA growth will resume after Dodd-Frank amendments to the registration provisions of the Advisers Act take effect, the staff continues.

Assuming an annual 5 percent growth rate, the staff is projecting that in 10 years, 13,908 advisers would be registered with the SEC, managing $62.7 trillion of client assets.

“This growth would outstrip the Commission’s examination resources without the commitment of substantial new funding, the staff report says.

The staff is suggesting three options for strengthening the SEC’s RIA examination program: impose user fees on RIAs registered with the SEC in order to fund examinations by OCIE; authorize self-regulatory organizations to examine such RIAs under SEC oversight; and authorize FINRA to examine dual registrants for compliance with the Advisers Act. Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at

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