Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, December 10, 2010

Don’t Depend on the Regulators

Financial advisors must register either with the states in which they do business or with the federal Securities and Exchange Commission (SEC). Currently, those advisors with $25 million or less of “assets under management” are regulated by the states in which they conduct business and those with more than $25 million of assets are regulated by the SEC. Starting next year, state regulators will manage advisors with up to $ 100 million of assets under management. Should you care?

We wrote in our blog just last week about the continuing problem of dishonest advisors who continue to fraudulently abscond with investors funds (There’s a Sucker Born Every Minute, Sunday, December 5, 2010). It would be nice if the state and federal regulators could better protect investors. Their resources, however, are severely limited.

Some think that state regulators can do a better job than the federal government since they typically audit advisors every three to five years, whereas the SEC typically audits ten percent of the advisors it regulates every year, according to a recent article in the Wall Street Journal by Jason Zweig titled “Will Shaking Up the Watchdog Take the Bite Out of Crime?". This means an SEC regulated advisor can expect to be audited only once every ten years.

Perhaps changing some advisors to be regulated by the states will free up resources at the SEC so they can audit advisors more often. But what about the smaller advisors regulated by the states? The recent economic crisis has created an economic crisis for state governments as well. Most states are faced with cutting services and are unlikely to be able to increase regulatory staff to address the coming increased workload. It seems likely, therefore, that state regulatory agencies may very well have to reduce the frequency with which they audit state-regulated advisors.

So it seems that the problem of regulating financial advisors won’t get better anytime soon. The larger advisors may be audited more often, the smaller ones, less often. The Ponzi schemers are both state regulated and SEC regulated. If you want to avoid being scammed, you have to do your own due diligence. Perhaps the best thing you can do is remember that “if it sounds too good, it likely is”. There’s no silver bullet.


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