Understanding Rep as PM Accounts in Investment Advisory Firms: Compliance Risks and Solutions

In recent years, the world of financial technology (fintech) has been advancing rapidly. Investment advisory firms are now able to access professional research through a variety of channels, and there are many model portfolios available for them to use. Many investment advisor representatives (IARs) have decided that their most efficient use of time is to focus on gathering assets and servicing client relationships, and they delegate the actual investing decisions to professionals who specialize in it. However, despite this, a high percentage of firms still allow their IARs to directly manage their clients' assets in "Rep as PM" accounts.

Rep as PM accounts involve IARs directly managing client accounts by selecting the securities to trade, usually on a discretionary basis, often based on their own research and due diligence, rather than relying on models or third-party managers. Some firms provide guidelines to their IARs, such as requiring them to use firm-approved capital market assumptions and model portfolios but allowing them to tweak the models, limiting them to use firm-approved asset allocation parameters, securities, or types of securities, or mandating the type or scope of due diligence to be conducted. Other firms have looser or no constraints on how accounts are managed, the types of investments permitted, the tools used, or even the underlying assumptions or asset allocations for the accounts. Some IARs have teams of analysts to conduct due diligence or subscribe to research services, while others conduct the research themselves.

This information comes from Expert Witness/Security Regulatory Attorney Miriam Lefkowitz and the full article appears in the April 2023 edition of NSCP Currents. The article discusses some of the compliance risks associated with the Rep as PM business model and offers some solutions for firms to consider. There are 11 risks cited, each with a number of compliance and supervision suggestions that will provide firms with a solid road map of issues to consider as part of those reviews.

To receive important information such as this and to review the risks and associated compliance and supervision suggestions, join NSCP today to receive NSCP Currents and stay up to date on issues such as this that matter most for the financial services industry. Members can access the full article here.