June 30, 2009
I am a small Registered Investment Advisor. All of the accounts I manage are in individual 401k or 403b accounts, Schwab, Vanguard, Hartford and/or Scottrade. In the cases of 401k or 403b accounts the client must make trades based on my recommendations. Each of the broker/dealer firms permit me to trade in the accounts but do not permit the withdraw or transfer of any funds other than quarterly fees. Each fee amount is authorized by the client in a Letter of Authorization form completed and understood by the client prior to any withdrawals and on file at the broker/dealer. In this form of business the investments are always available to the client, the client receives notice of all transactions, the client can view his/her account at any time day or night, the dollars are always in the name of the client and the money is always the client's. If the client wishes to override the manager, he/she can do so. As assets under management reach a certain dollar size RIA's are required to have audited financial statements.
This form of check and balance seems fine in that without the client permission I am precluded by the broker/dealer from taking money from a specific account. Further audit seems totally unnecessary and a waste of money. The increased cost would be additional fees placed on the client thus a form of new taxation.
The Madoff issue goes to a different form of investment firm than the form of RIA firm described above. The Madoff risk involves the client writing a check to the investing firm for the total amount of the investment dollars to be invested as the firm sees fit. Usually, with this arrangement the only reporting on the progress of the investments comes from the investing firm. There are no checks and balances in this structure. These firms must be audited at their own expense. This is where the fraud can creep in. The auditor must be independent....maybe authorized by a government agency to do audits for investment firms and not FOB's (friends of Bernie).
Don't paint us all with the same brush. Most of the RIA's I know do business as I described in the first paragraph above. The one's that need extra oversight are the Madoff type firms.