B-Ds Many Times More Likely to Recommend Complex Products Than RIAs

By Alex Padalka September 28, 2020

Broker-dealers are far more likely to recommend complex, risky investment products such as leveraged exchange-traded funds to investors than RIAs, according to a recent report looking at industry practices before the implementation of the SEC’s Regulation Best Interest.

The North American Securities Administrators Association says there were “notable differences between broker-dealers operating under a suitability standard and investment advisers operating under fiduciary duties.”

Broker-dealers had a more diverse offering of investment products available to retail investors than RIAs, but few firms — broker-dealers and RIAs included — offered complex, risky products such as private offerings, non-traded real estate investment trusts, leveraged- or inverse-ETFs or variable annuities, according to an examination of more than 2,000 broker-dealers and RIAs, which together represent more than 360,000 investment professionals and serve 68 million retail investor accounts.

The examinations found that two-thirds of the firms analyzed didn’t in fact make any of those products available to customers, NASAA says.

However, the examiners also found that RIAs were typically more conservative in their investment approach, in that they generally stayed away from higher-cost, riskier and complex investment products. In addition, RIAs reported stronger disclosure, diligence and conflict management practices, NASAA says. 

But the biggest difference between RIAs and broker-dealers was in the rate of recommending complex products.

“When complex products were sold, broker-dealers were twice as likely as investment advisers to recommend the purchase of leveraged and inverse ETFs, seven times as likely to recommend private placements, eight times as likely to recommend variable annuities, and nine times as likely to recommend non-traded REITs,” NASAA says.

State securities regulators plan to conduct further examinations next year to determine the effect of Reg BI on industry practices, Lisa Hopkins, NASAA president and West Virginia senior deputy securities commissioner, says in a statement.

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