SEC Charges RIA With Fraud for Paid Investment Recommendations
WASHINGTON -- An investment advisory firm is facing fraud charges in connection with an undisclosed compensation arrangement the advisors allegedly maintained with their broker involving a set of mutual funds they were recommending to clients.
The SEC claims that over an eight-year period, the Houston-based Robare Group netted $440,000 in payments from a broker for persuading clients to invest in the funds in question, amounting to a clear conflict of interest that the co-owners of the firm failed to disclose.
"Payments to investment advisors for recommending certain types of investments may taint their ability to provide impartial advice to their clients," Marshall Sprung, co-chief of the SEC Enforcement Division's Asset Management Unit, said in a statement. "By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive."
The SEC notes that the Robare Group and its co-owners, Mark Robare and Jack Jones, disclosed the compensation arrangement with the broker in December 2011 -- but says the firm did not acknowledge the full extent of the quid pro quo by denying that the firm received non-client income for providing investment advice. The SEC alleges that the broker paid the Robare Group a percentage of every dollar the RIA's clients invested in the mutual funds in question.
Robare and Jones did not immediately respond to requests for comment.
The Robare Group, which does business as Robare & Jones Asset Managers, is an independent asset management firm catering to retirees, which account for about 85% of its client base, according to the firm's website. The practice counts around 350 separately managed accounts totaling about $150 million in assets under management. Both Robare, the firm's founder and principal, and Jones are CFPs.
The cease-and-desist order that the SEC issued on Tuesday is the latest action from the commission in an initiative to root out undisclosed compensation arrangements that could influence the investment advice that investors receive from their advisors.
The SEC put the advisory world on notice when it issued its 2014 examination priorities in January, citing "compensation arrangements for the advisor, with a particular focus on undisclosed compensation arrangements and their effect on recommendations made to clients" as one of the chief conflicts that the staff would be looking for as they conducted evaluations of practices.
"This is another warning message to all investment advisors that the SEC is serious about breaches of fiduciary duty when an advisor fails to disclose conflicts of interest," says Duane Thompson, senior policy analyst at the fiduciary training firm fi360.
The SEC did not identify the broker involved in the alleged compensation arrangement with the Robare Group. A spokesman for the commission cited a policy of not disclosing the names of "uncharged entities" in public charging documents.
On its website, the Robare Group states that it offers securities through Triad Advisors. A Triad spokeswoman did not immediately respond to a request for comment, and the SEC would not confirm that Triad was the broker in question.
The SEC's order details provisions in a servicing fee agreement between the Robare Group and its broker. That agreement included a fee schedule whereby the broker would pay the RIA between two and 12 basis points for clients' investments in eligible no-transaction fee mutual funds that were mostly unaffiliated with the broker, but available through the broker's platform.
"Thus, under the Servicing Fee Agreement, the Broker paid Robare Group a percentage of every dollar that Robare Group's clients invested in NTF mutual funds unaffiliated with [the] Broker," the SEC's order alleges. "The percentage amount the Broker paid pursuant to the Servicing Fee Agreement increased when the amount of client assets Robare Group placed into eligible NTFs reached specified levels."
That agreement was in place from 2004 through 2012, when it was revised to a payment of 10 basis points on clients' investments in eligible NTF funds. The Robare Group assumed responsibility in those agreements for making the requisite disclosures about the compensation arrangement, which the SEC charges were missing from the firm's Form ADV filings and from other communications with clients.
The Robare Group and its co-owners, each facing charges of violating the Investment Advisers Act, will have 20 days from the service of the SEC's order to formally respond. The commission would then convene a public hearing within one to two months of serving the order.
Thompson of fi360 suggests that the arrangement between the Robare Group and its broker, as described in the SEC's order, does not inherently run counter to the advisor's fiduciary duty. But, as with so many instances of conflicted advice, the chief error appears to have been the failure to disclose the full extent of the relationship and the monetary incentives in play.
"With regard to the overall advisor community, I don't think this kind of enforcement issue poses a problem if an advisor fully discloses all indirect compensation arrangements, or simply avoids them altogether," Thompson says. "Of course, the SEC flagged this as a problem at the beginning of the year, so that alone suggests there have been more than a few incidents of this type and advisors who do accept third-party compensation need to ensure that the client is fully informed and understands the conflict."
Kenneth Corbin is a Financial Planning contributing writer in Washington.