Nov. 01, 2022
November 1, 2022 In reading/skimming the proposed ruling on RIA outsourcing it becomes very obvious to me that this proposed regulation will not add value to the industry or to investment clients. The regulation would either have no impact on the advisers business with another meaningless form to complete, or if the regulation does required a deeper due diligence by an RIA then the burden will be costly and may have negligible value to any clients. As stated on page 13 and 15 it appears that the Fiduciary duty and record keeping duty that this rule is trying to address are already laws on the books. This rule should not be put in place to simply make the SEC enforcement easier. This rule also implies that outsourcing is riskier and less competent than inhouse operations. This is a large assumption and inaccurate. As an owner of an RIA it is unrealistic to think that we could move our Client Relationship Management system inhouse and serve our clients as well as when it is outsources. The same goes f or Sub-Adviser relationships. We utilize many Sub-Advisers and do so because the value add is significant compared to attempting to replicate investment strategies inhouse for individual clients. The risk of error or oversight grows exponentially the more strategies attempted inhouse. The simple fact that we have selected an Sub-Adviser means they have passed our Adviser and RIA level due diligence. Having an SEC level due-diligence will not improve this process. It will only slow it down. Then the regulation lays out the 6 criteria which would need to be tracked and recorded. Without going into each item it is clear that the objective is to add more burden to the advisers in filling out forms and filing useless records. Adding any of this as a disclosure to ADVs would also be a mistake. It is tough enough for clients to understand how each adviser works and gets paid. This will simply add confusion as most of the Sub-Advisers listed on an ADV would be irrelevant for most clients. T his would add confusion and imply some additional expertise which isn't actually happening. This additional burden to Advisers has been quantified in the rule at a cost of $240,000,000 per year as stated on page 189. They don't attempt to quantify the value of this rule and I would expect the value to clients would be much closer to $0 instead of $240,000,000. The open ended nature of the law says that it would apply to relevant 3rd parties which could affect a clients performance. Would this make every ETF and Mutual Fund company present due diligence for their funds? If so would it address low volume asset classes which pose a increased risk of volatility especially with ETFs. Or would it address large ETFs with Vanguard and Blackrock(iShares) which invest in practically lock set with each other and the index and utilize futures contracts for Index alignment. With this rule in place an adviser would be encourage to ignore the risks that the industry ignores since the SEC is unlike ly to bring any meaningful penalties to the big firms. This along with the added cost will continue to centralize and concentrate the industry with large firms which act and invested very similar to each other. This will absolutely be harmful to clients and the industry as a whole. The clients who will be hurt the most will be low account balance clients which will disproportionately hurt those who need good advice and good advisers the most. This rule is a mistake and should not be pursued. Over my 13 year career I could list half a dozen BAD advisors who should be removed from the industry. None of them would have any issue with this meaningless regulation. The bad advisers will continue to harm clients. Thank you, Justin Struble