It's important to shine a light on the inner workings of an advisor's business—providing insights that may help investors better understand exactly what happens inside a firm they trust to manage their money and make decisions about their financial future. I thought a good place to start would be to examine the regulatory examination process itself.
Registered investment advisors tend to loathe the thought of being examined by securities regulators. It's time-consuming and creates an amazing amount of anxiety, even for those who have done nothing wrong. It's akin to heading in for a full medical exam after not seeing a doctor for years. At the same time, investment advisors share a sense of gratitude for the examination process, that there are "cops on the beat."
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The Securities and Exchange Commission is the governing regulatory agency for registered investment advisors that manage more than $100 million in assets, while each state's securities regulators generally oversee other investment advisors. Let's not confuse them with the Financial Industry Regulatory Authority, which is the self-policing organization that oversees brokerage firms.
I can imagine that if you hear of regulators turning up at your investment advisor's office, your thoughts might immediately turn to Bernie Madoff as panic takes hold. Fear not!
It is highly unlikely that your advisor has done anything at all to trigger the examination. Every registered investment advisor is subject to regular examinations. While the industry, regulators and lawmakers would like to increase the frequency of examinations, fewer than 1 in 10 firms will undergo a routine regulatory audit in any given year. In 2014, that meant that 1,164 investment advisors were examined by the SEC and only a small number of those—firms referred to enforcement—had significant problems.