Getting Their Priorities Straight: Retail Investors

By Abigail Howd, Spring 2018 IAC Student Intern

In 1961, The Miracles sang, “My mama told me, you better shop around.”  This motherly advice applies to more than just the game of love.  It is good for investors to shop around before committing to investment firms or broker-dealers, and once they find one, investors also need to shop around for which investments are suitable for their financial needs and goals.  Protecting individual investors and consumers, referred to as “retail investors,” is part of the SEC’s mission.  The SEC’s Office of Compliance Inspections and Examinations (OCIE) included retail investors in its 2018 examination priorities.  OCIE provided a list of areas it will focus on to make sure investors have the information they need to shop around and protect themselves.  Here are some highlights from that list:

  1. Disclosure of the costs of investing – Retail investors need to know how much of their money goes towards fees and expenses instead of into an investment for their benefit. The OCIE will make sure that firms properly disclose fees and expenses as well as any conflicting interests the firm might have to recommend certain investments.
  1. Electronic investment advice – In our world of technology, some firms now offer “robo-advisers,” which provide automated investment advice. The OCIE will review the algorithms used to generate their automated investment advice and verify compliance in matters such as protecting investor data and disclosing conflicts of interest.
  1. Wrap fee programs – A wrap fee program “involves an investment account where you are charged a single, bundled, or ‘wrap’ fee for investment advice, brokerage services, administrative expenses, and other fees and expenses.” The OCIE will oversee firms’ recommendations of wrap fee programs as well as their disclosure of conflicting interests and fees to verify they are compliant and reasonable.
  1. Never-before-examined investment advisers – Due to the sheer number of investment advisors, the SEC is unable to examine all of them every year. The OCIE plans to use data to identify and examine high-risk areas such as newly-registered investment advisers or those who have not recently been examined.
  1. Senior investors and retirement accounts and products – Senior investors are often subject to exploitation and financial abuse. They have shorter time horizons and often cannot take as many risks as younger investors.  For these reasons, the OCIE will pay particular attention to the suitability of investments recommended to senior investors.
  1. Mutual Funds and Exchange Traded Funds (ETFs) – Mutual funds and ETFs are “the primary investment vehicles for many retail investors.” The OCIE will focus on mutual funds that have poor performance history and that are managed by inexperienced investment firms. The OCIE will also review ETFs that risk being delisted from an exchange and having to liquidate their assets.